IndexUniverse had an article up yesterday about the rebalancing at Russell Investments that occurs every June and was just implemented for 2009. IU seemed most interested in the increasing presence of Chinese stocks.
The five largest stocks in the Russell Global Index (I'm not familiar with this one) in order are;
Petrochina (PTR)
ExxonMobil (XOM)
Industrial & Commercial Bank of China (IDCBY)
China Mobile (CHL) a client holding
Walmart (WMT)
We are all much more aware of China as an investment destination than we were seven years ago. I seem to remember that the first Chinese stock on the NYSE was Sinopec Shanghai Petrochemical (SHI), but I may have that wrong, and then it seemed like most people knew about Petrochina early in this decade when Warren Buffet first piped up about having a position.
Fast forward a few years and US based investors can now access Chinese solar stocks, water stocks, technology companies and even shampoo companies. We clearly had a mania in Chinese stocks for a while there, then the market imploded and now things are whipping up again but the Shanghai market is still down more than half from its high, the Hang Seng down about 40% from its high and the Hang Seng H Shares, or enterprise index, is down 45% from its high.
I've disclosed my involvement with China many times before. I sold my only position in May 2007 (the other Sinopec with ticker SNP) and bought back in with China Mobile in the summer of 2008. I was a little early on both getting out and getting back in.
If IPOs like BaWang can do well, the shampoo company mentioned above, then that is reason to be concerned about overheating despite being so far below the old highs. The long term fundamental case for China has been made many times in many places but the decline is a good reminder that the stocks will be cyclical and volatile even if the big picture story remains in tact.
The best way to avoid getting badly hurt from another implosion is simply to not own too much. I currently target a 2% weight and I could see getting as high as 5%. That's 5% and I absolutely love the theme. I loved the theme during the 14 months I had no exposure. As great as something might be you can still get it wrong. Being wrong is not as bad as what the consequence of being wrong might be.
Speaking of themes I love there was an interesting segment on Squawk Australia on Tuesday morning (Aussie time) with Steve Johnson from a firm called Intelligent Investor. The end of the conversation was about his opinions on Australian Infrastructure funds/stocks. He said he currently likes four or five out of the 20 that he covers. Twenty? Macquarie and Babcock & Brown each have quite a few funds listed in Australia and there are a couple of others.
Infrastructure is just as important a theme as China (obviously there is overlap). The money is going to be spent on infrastructure and despite how much some of the stocks and funds went down the money was never not going to be spent. The US is not quite at the investment saturation point that Australia might be (the US may have 20 funds out there to pick from but the Australian market is a tiny fraction of the US market) but with all the new sector talk and other hype out there you avoid getting really hurt by something unforeseen by not making a big bet.
I get questioned a lot on the don't make a big bet mantra but think about how many themes there could be out there and how many you might have an opinion on. Just the other day I mentioned a half dozen just in the industrial sector. Five or six themes at 5% each on top of the more plain vanilla things you may hold and you probably have a full plate.
Read more!
Wikinvest Wire
Tuesday, June 30, 2009
Monday, June 29, 2009
There Will Be Work
We have a fenced in pen off of our deck for the dogs to have a little bit of room to explore and play. A couple of weeks ago our two smallest dogs got out after something (maybe a squirrel?) dug a small hole in from the outside of the pen. The two dogs were only gone for a few minutes but it was very scary for a little bit. We had lined most of the pen with rocks of varying sizes but it was not perfect.
So Sunday morning Joellyn and I embarked on a masonry project where we made up some concrete, moved rocks and then reset the rocks in the concrete while trying to work the little bit of chicken wire that runs along the bottom of the fence into the concrete. What does this have to do with investing you may ask?
On Sunday a reader left a comment in response to my writing about owning foreign equities asking "doesn't it depend on what foreign equities you own?" Well yes it does.
The work in the pen required heavy lifting of many bags of concrete and adding more heavy rocks to the fencing. The idea of gravitating toward more foreign exposure more narrowly than just owning iShares MSCI EAFE Index Fund (EFA) requires a different type of heavy lifting. As a quick note EFA blends away a lot of attributes of the smaller, healthier countries, provides a lot of exposure to Japan and big Western Europe and tends to correlate much closer to the US market than many single country funds.
The concrete needed to be mixed, the rocks that were already there needed to be moved, more rocks, where needed, had to be hauled in from elsewhere on our property, everything needed to be set and then everything needed to be properly cleaned up; there were no short cuts.
If you believe your portfolio needs to become progressively more foreign then you need to learn the dynamics of many other foreign countries, figure the role that these countries can play in your portfolio, figure out how to access those countries and then follow those countries effectively; there can be no short cuts.
I realize there are time considerations, that people in general just may not want to devote this much energy to this and of course I may be wrong about the need for more foreign but this is how I see it. Of course there will be the hard core (or maybe not so hard core) passive investors who say this is just speculation and not investing.
I doubt I will change anyone's mind on this subject if I have not already done so but for a similar view from a different voice check out this week's Connie Mack show, specifically the segment with Andrew Lo from MIT and a half dozen other places. The simplistic takeaway from the interview is that things like buy and hold and using broad based index funds are not wrong but they need updating.
This may be a tie in with my views about markets and investing evolving. I have been writing about this as long as I have been writing. Over reliance on well it's always worked before is a bad idea. The status quo might be comfortable but are you willing to bet your future that it will be correct?
The picture is from the fence's earliest days.
Read more!
So Sunday morning Joellyn and I embarked on a masonry project where we made up some concrete, moved rocks and then reset the rocks in the concrete while trying to work the little bit of chicken wire that runs along the bottom of the fence into the concrete. What does this have to do with investing you may ask?
On Sunday a reader left a comment in response to my writing about owning foreign equities asking "doesn't it depend on what foreign equities you own?" Well yes it does.
The work in the pen required heavy lifting of many bags of concrete and adding more heavy rocks to the fencing. The idea of gravitating toward more foreign exposure more narrowly than just owning iShares MSCI EAFE Index Fund (EFA) requires a different type of heavy lifting. As a quick note EFA blends away a lot of attributes of the smaller, healthier countries, provides a lot of exposure to Japan and big Western Europe and tends to correlate much closer to the US market than many single country funds.
The concrete needed to be mixed, the rocks that were already there needed to be moved, more rocks, where needed, had to be hauled in from elsewhere on our property, everything needed to be set and then everything needed to be properly cleaned up; there were no short cuts.
If you believe your portfolio needs to become progressively more foreign then you need to learn the dynamics of many other foreign countries, figure the role that these countries can play in your portfolio, figure out how to access those countries and then follow those countries effectively; there can be no short cuts.
I realize there are time considerations, that people in general just may not want to devote this much energy to this and of course I may be wrong about the need for more foreign but this is how I see it. Of course there will be the hard core (or maybe not so hard core) passive investors who say this is just speculation and not investing.
I doubt I will change anyone's mind on this subject if I have not already done so but for a similar view from a different voice check out this week's Connie Mack show, specifically the segment with Andrew Lo from MIT and a half dozen other places. The simplistic takeaway from the interview is that things like buy and hold and using broad based index funds are not wrong but they need updating.
This may be a tie in with my views about markets and investing evolving. I have been writing about this as long as I have been writing. Over reliance on well it's always worked before is a bad idea. The status quo might be comfortable but are you willing to bet your future that it will be correct?
The picture is from the fence's earliest days.
Read more!
Sunday, June 28, 2009
Sunday Morning Coffee
Barron's was a keeper this weekend. Of most interest was an article about the latest trials and tribulations of the university endowments and an interview with the guy running CALPERS these days.
First up is the CALPERS interview. There was a money quote and the fund's allocation.
Global Equities 49%
Fixed Income 20%
Private Equity 14%
Real Estate 10%
Inflation Linked Including Commodities 5%
Cash 2%
CALPERS had to increase the target for private equity because the value of everything else fell so much it raised the weighting to private equity. This is the same concept I talk about with using SDS. If the market falls a lot SDS will grow to a larger weight in the portfolio thus hedging more. As I understand the article, had they not done this they would have been forced to sell some of their PE exposure.
The fund is trying to make it's "assumed rate of return of 7.75%." The brings up an important point. Many people think in terms of the stock market averaging some percent every year. Maybe the number is 10% or 8% or something else but something. Unfortunately reality is much lumpier than 9% per year. Whatever the real number is it includes all the 1997s, 2008s and everything in between.
Pensions and endowments cannot be very flexible with what they payout for their obligations but you can be--maybe. Obviously living below your means helps here. When the market has the occasional really bad year (not talking a 10% decline) you have a better chance of cutting back on certain expenditures than a pension fund does.
The money quote;
So they need to increase their foreign exposure to get the growth they need. That should sound familiar to long time readers. This has been an ongoing theme and I am convinced it will continue to become ever more important. I would note this does not have to mean 30% in emerging.
The table is from Barron's and shows the allocations of several college endowments. It seems that things were great for a long time and then market declined which coincided with liquidity problems and now the entire endowment theory is being called into question. Well Byron Wien as questions anyway.
The article is a good read and I certainly am interested in what happened and what changes there may be as a result of 2008 but I am more interested in what you and I can learn from all of this; benefiting from their mistakes if there were any mistakes.
One of the ideas that emerged from the article was that returns in the future will be less than they were in the past. Perhaps that is correct but I had one encouraging thought for the endowments to the extent they continue to invest with hedge funds. If US interest rates go up as much as some people think there will be some hedge funds that go up several hundred percent shorting the bond market and perhaps the endowments will own such a fund.
In looking at the table you can see how heavy they are in alternative assets (so also illiquid) and how they did. A big focus over the years here has been all things in moderation and I don't think the above weightings in the alternative stuff is moderate, far from it. Anyone, anywhere caught up in some sort illiquid asset implosion had no control over what happened and probably could not have anticipated the totality of what happened but they did have control of how much they allocated to these things.
A little can go a long way. People have a tough time with that one but all I can say is it is true and simple.
Read more!
First up is the CALPERS interview. There was a money quote and the fund's allocation.
Global Equities 49%
Fixed Income 20%
Private Equity 14%
Real Estate 10%
Inflation Linked Including Commodities 5%
Cash 2%
CALPERS had to increase the target for private equity because the value of everything else fell so much it raised the weighting to private equity. This is the same concept I talk about with using SDS. If the market falls a lot SDS will grow to a larger weight in the portfolio thus hedging more. As I understand the article, had they not done this they would have been forced to sell some of their PE exposure.
The fund is trying to make it's "assumed rate of return of 7.75%." The brings up an important point. Many people think in terms of the stock market averaging some percent every year. Maybe the number is 10% or 8% or something else but something. Unfortunately reality is much lumpier than 9% per year. Whatever the real number is it includes all the 1997s, 2008s and everything in between.
Pensions and endowments cannot be very flexible with what they payout for their obligations but you can be--maybe. Obviously living below your means helps here. When the market has the occasional really bad year (not talking a 10% decline) you have a better chance of cutting back on certain expenditures than a pension fund does.
The money quote;
To try to capture more growth, we have to look at expanding our allocations in emerging markets. In emerging markets over the past year, we've greatly increased international exposures.
So they need to increase their foreign exposure to get the growth they need. That should sound familiar to long time readers. This has been an ongoing theme and I am convinced it will continue to become ever more important. I would note this does not have to mean 30% in emerging.
The table is from Barron's and shows the allocations of several college endowments. It seems that things were great for a long time and then market declined which coincided with liquidity problems and now the entire endowment theory is being called into question. Well Byron Wien as questions anyway.The article is a good read and I certainly am interested in what happened and what changes there may be as a result of 2008 but I am more interested in what you and I can learn from all of this; benefiting from their mistakes if there were any mistakes.
One of the ideas that emerged from the article was that returns in the future will be less than they were in the past. Perhaps that is correct but I had one encouraging thought for the endowments to the extent they continue to invest with hedge funds. If US interest rates go up as much as some people think there will be some hedge funds that go up several hundred percent shorting the bond market and perhaps the endowments will own such a fund.
In looking at the table you can see how heavy they are in alternative assets (so also illiquid) and how they did. A big focus over the years here has been all things in moderation and I don't think the above weightings in the alternative stuff is moderate, far from it. Anyone, anywhere caught up in some sort illiquid asset implosion had no control over what happened and probably could not have anticipated the totality of what happened but they did have control of how much they allocated to these things.
A little can go a long way. People have a tough time with that one but all I can say is it is true and simple.
Read more!
Saturday, June 27, 2009
Friday, June 26, 2009
New Peru
My article for TSCM about the iShares All Peru Capped Index Fund (EPU) has been posted. You can read it here.
Edited out of the article was a quote from an iShares portfolio manager that I spoke to who said that the yield could be in the neighborhood of 4%. This surprised me because the two largest holdings pay almost nothing and the third largest holding pays about 2.5%.
Read more!
Edited out of the article was a quote from an iShares portfolio manager that I spoke to who said that the yield could be in the neighborhood of 4%. This surprised me because the two largest holdings pay almost nothing and the third largest holding pays about 2.5%.
Read more!
The Anti White Paper
The latest Journal of Indexes is up at IndexUniverse and as usual there is plenty of meat on the bone but I wonder if there might not be a little too much to chew on.
I looked at two articles in particular, one called The Future of Portable Alpha and the second was How To Kill A Black Swan.
Both articles are very long and very difficult to read as they read like text books. A short definition of portable alpha is best given as an example; deposit $100,000 into an account and instead of putting it all into the S&P 500 SPDR (SPY) spend just a little of the cash buying some sort of derivative that replicates $100,000 worth of equity exposure and put the remaining cash into treasuries or TIPs. Theoretically this allows for capturing the market's upside of the equity market plus a little extra.
I believe PIMCO has a fund (maybe more than one) that does this and if memory serves it has not done very well. Anyone who knows more about these funds is encouraged to leave a comment spelling it out better.
There is a quote attributed to Albert Einstein where he said something like if you can't explain something simply then you don't know it well enough. Peter Lynch says something similar in saying the you should be able to explain your rationale for buying a stock to a child. I am not asserting that the authors of the articles in question don't know their subject and I would say it depends on the child but there is an argument for keeping things simple. This is especially true for do-it-yourselfers that do not want to spend 80 hours a week watching the markets.
Investing can be a complicated or simple as you want to make it. The Portable Alpha article is almost 4400 words--true white papers are even longer than that. One of the building blocks of the strategy chronicled on this site is the effort to keep things simple. Simple is one of the reasons why I think top down portfolio construction is the way to go. It starts simply with whether the market is healthy or not.
From there it flows toward assessing countries, sectors, themes and where the stock market and economic cycles are. There is work involved with this but there is nothing white-paper complicated about realizing the economy is slowing down or that the price of some commodity just skyrocketed. I think making decisions based on these sorts of on the ground indicators is much simpler than what is spelled out in both articles.
I talk about building portfolios at the sector level. I think this is simple other folks have weighed in via the comments that it is not simple. You can decide for yourself but there are some pretty reliable fundamental indicators that stand up in cycle after cycle about what to overweight when or what to underweight and when.
The way I look at things the financial sector warned of trouble years before things actually started to meltdown, first when financials grew to 20% of the S&P 500 and then when the yield curve first inverted in early 2006. There was an avalanche of commentary saying that the inversion didn't matter because it was being caused buy Chinese buying. The simpler answer turned out to be correct.
Anyone wanting to stop at that point and not convert these things into a portfolio of individual stocks can capture a lot of speciality via ETFs or other exchange traded products. Recently iShares has listed two very interesting funds; the Emerging Markets Infrastructure Fund (EMIF) and the Peru ETF (EPU). A few weeks ago Market Vectors listed a Small Cap Brazil Fund (BRF) and a while back Claymore launched a Small Cap China Fund (HAO). I don't use any of those funds for now but I am especially intrigued by those first two for future use.
The industrial sector currently makes up about 10% of the S&P 500. If you were using stocks to build the sector you might have a defense stock, a water equipment company and some sort of big cap conglomerate. All three have multiple ETF choices to pick from. In addition to those subsectors there are also multiple choices nuclear, alternative energy (both of those are more industrial than energy) and some of the infrastructure ETFs are heavy in industrials stocks. These industrial subsectors and themes are far from obscure.
Most of the sectors can be dissected this way and invested in just as precisely.
I know there is disagreement on constructing portfolios in this manner but from the top down knowing when the market might be unhealthy (read Hussman), having a sense of how the market usually works (read Bespoke) and being in touch with current events (read Alphaville and Marketbeat) is not that complicated. Despite what some would have you believe you don't have to be as confused about investing as the orangutan above is about being in the pool.
Read more!
I looked at two articles in particular, one called The Future of Portable Alpha and the second was How To Kill A Black Swan.
Both articles are very long and very difficult to read as they read like text books. A short definition of portable alpha is best given as an example; deposit $100,000 into an account and instead of putting it all into the S&P 500 SPDR (SPY) spend just a little of the cash buying some sort of derivative that replicates $100,000 worth of equity exposure and put the remaining cash into treasuries or TIPs. Theoretically this allows for capturing the market's upside of the equity market plus a little extra.
I believe PIMCO has a fund (maybe more than one) that does this and if memory serves it has not done very well. Anyone who knows more about these funds is encouraged to leave a comment spelling it out better.
There is a quote attributed to Albert Einstein where he said something like if you can't explain something simply then you don't know it well enough. Peter Lynch says something similar in saying the you should be able to explain your rationale for buying a stock to a child. I am not asserting that the authors of the articles in question don't know their subject and I would say it depends on the child but there is an argument for keeping things simple. This is especially true for do-it-yourselfers that do not want to spend 80 hours a week watching the markets.
Investing can be a complicated or simple as you want to make it. The Portable Alpha article is almost 4400 words--true white papers are even longer than that. One of the building blocks of the strategy chronicled on this site is the effort to keep things simple. Simple is one of the reasons why I think top down portfolio construction is the way to go. It starts simply with whether the market is healthy or not.
From there it flows toward assessing countries, sectors, themes and where the stock market and economic cycles are. There is work involved with this but there is nothing white-paper complicated about realizing the economy is slowing down or that the price of some commodity just skyrocketed. I think making decisions based on these sorts of on the ground indicators is much simpler than what is spelled out in both articles.I talk about building portfolios at the sector level. I think this is simple other folks have weighed in via the comments that it is not simple. You can decide for yourself but there are some pretty reliable fundamental indicators that stand up in cycle after cycle about what to overweight when or what to underweight and when.
The way I look at things the financial sector warned of trouble years before things actually started to meltdown, first when financials grew to 20% of the S&P 500 and then when the yield curve first inverted in early 2006. There was an avalanche of commentary saying that the inversion didn't matter because it was being caused buy Chinese buying. The simpler answer turned out to be correct.
Anyone wanting to stop at that point and not convert these things into a portfolio of individual stocks can capture a lot of speciality via ETFs or other exchange traded products. Recently iShares has listed two very interesting funds; the Emerging Markets Infrastructure Fund (EMIF) and the Peru ETF (EPU). A few weeks ago Market Vectors listed a Small Cap Brazil Fund (BRF) and a while back Claymore launched a Small Cap China Fund (HAO). I don't use any of those funds for now but I am especially intrigued by those first two for future use.
The industrial sector currently makes up about 10% of the S&P 500. If you were using stocks to build the sector you might have a defense stock, a water equipment company and some sort of big cap conglomerate. All three have multiple ETF choices to pick from. In addition to those subsectors there are also multiple choices nuclear, alternative energy (both of those are more industrial than energy) and some of the infrastructure ETFs are heavy in industrials stocks. These industrial subsectors and themes are far from obscure.
Most of the sectors can be dissected this way and invested in just as precisely.
I know there is disagreement on constructing portfolios in this manner but from the top down knowing when the market might be unhealthy (read Hussman), having a sense of how the market usually works (read Bespoke) and being in touch with current events (read Alphaville and Marketbeat) is not that complicated. Despite what some would have you believe you don't have to be as confused about investing as the orangutan above is about being in the pool.
Read more!
Thursday, June 25, 2009
Money Quote
John Serrapere has a new article up at Index Universe and actually there are two money quotes. Overall the article is an assessment of where things are now, what that might mean in the in the future and how he is positioning his portfolio.
For now he says he is going to ignore short term bullish signs and focus more on longer term fundamentals.
The first money quote is as follows;
The reason why I think the quote is useful is that it underscores the idea that investing is not easy. I believe there are ways to make it easier on yourself but it is not easy. Everyone has their own process and perhaps given the totality ofSerrapere's process this is a particularly trying time. I don't know if that is the case, just an interpretation. An occasional reminder that this can be tough can be a psychological helper.
The other money quote;
This is sort of what I try to do, I say sort of. First I don't quantify it so succinctly and I only try to sort of do that when the market is in a bear phase, more correctly when demand for equities is unhealthy or questionable.
Long time reader Leisa echoed my sentiments the other day about believing in adding value by avoiding a lot of the downside or as I have been saying avoiding the full brunt of down a lot. Yesterday I disclosed having added a little SDS to client accounts late in the day on Tuesday. An hour or two into the day on Wednesday a reader said I was too early. Well maybe but the context here is trying to avoid the full brunt of down a lot which now has a higher probability than it did a couple of months ago when the market was much lower.
So in that context there is no way to be right or wrong after less than three hours of trading. It is not important how I protect against what I think the market might do but what is important is for you to figure out what you might do in case you think the market could have another big run down--even if you would do nothing. Even if you are in the everything is speculation crowd there is no reason you can't have an opinion about what the stock market might do. Just preparing mentally for a big decline with no action can help with enduring such a drop.
It seems like every time the market pukes down very few people prepared for it. A point I have made before is that recognition that there is more risk to the downside can, if nothing else, help prevent you from panic selling at the low.
For an extra money quote related to Manny Ramirez who is playing with the Albuquerque Isotopes this week on a rehab stint; in the Red Sox pregame show yesterday Jim Rice said that Manny should cut his hair, keep his mouth shut and just play baseball.
Read more!
For now he says he is going to ignore short term bullish signs and focus more on longer term fundamentals.
The first money quote is as follows;
Given the high degree of economic uncertainties...I’ve got to wonder what is worth buying and holding onto at this point.
The reason why I think the quote is useful is that it underscores the idea that investing is not easy. I believe there are ways to make it easier on yourself but it is not easy. Everyone has their own process and perhaps given the totality ofSerrapere's process this is a particularly trying time. I don't know if that is the case, just an interpretation. An occasional reminder that this can be tough can be a psychological helper.
The other money quote;
The AI (Arrow Insight) 75-50’s primary objective is to capture 75% of the S&P’s upside and 50% of its downside.
This is sort of what I try to do, I say sort of. First I don't quantify it so succinctly and I only try to sort of do that when the market is in a bear phase, more correctly when demand for equities is unhealthy or questionable.
Long time reader Leisa echoed my sentiments the other day about believing in adding value by avoiding a lot of the downside or as I have been saying avoiding the full brunt of down a lot. Yesterday I disclosed having added a little SDS to client accounts late in the day on Tuesday. An hour or two into the day on Wednesday a reader said I was too early. Well maybe but the context here is trying to avoid the full brunt of down a lot which now has a higher probability than it did a couple of months ago when the market was much lower.
So in that context there is no way to be right or wrong after less than three hours of trading. It is not important how I protect against what I think the market might do but what is important is for you to figure out what you might do in case you think the market could have another big run down--even if you would do nothing. Even if you are in the everything is speculation crowd there is no reason you can't have an opinion about what the stock market might do. Just preparing mentally for a big decline with no action can help with enduring such a drop.
It seems like every time the market pukes down very few people prepared for it. A point I have made before is that recognition that there is more risk to the downside can, if nothing else, help prevent you from panic selling at the low.For an extra money quote related to Manny Ramirez who is playing with the Albuquerque Isotopes this week on a rehab stint; in the Red Sox pregame show yesterday Jim Rice said that Manny should cut his hair, keep his mouth shut and just play baseball.
Read more!
Wednesday, June 24, 2009
200 DMA
Yesterday was the second day that the S&P 500 closed below its 200 DMA, not by much though. I had the share amounts for an SDS purchase all sorted out and the day ended up being a will I or won't I.
In early May I bought a half position in SDS thinking the rally had mostly topped out, with a plan at the time to add more on a 5% move in either direction. Then as we got close to a 5% move up, the 200 DMA came down quickly making a purchase of more SDS at that point a little trickier.
The trade yesterday was simply to double up on the amount of SDS purchased in early May taking most clients to somewhere near 2%. There were exceptions here and there so this should be thought of as generally speaking.
For ages I have been thinking there would be one more plunge that would scare the hell out of people and if that happens I like the idea of having a little more SDS and some cash. If we trade narrowly sideways for a while as some feel will happen then this purchase will neither help nor hinder the portfolio. If we whiz higher than the SDS and cash become a drag--a progressively small drag as the market goes up.
I considered not taking any defensive action because despite the recent increase in tech exposure the portfolio typically has gone down less on down days which is the goal after all. If the S&P 500 were to go down to 700 however I would want more protection than what I had before yesterday's trade.
Despite the little bit of heckling over my comments about this sometimes being science and sometimes being art I do think this sort of thing is more art than anything else. While discipline is important, if you have been reading this site for a while then you realize this conversation not about staying disciplined it is about trying to figure the best way through this.
All of the green shoots talk, increasing confidence among many and Hussman's belief that up to this point we have not gone through a revulsion phase leaves me less confident for the near term. However I could be wrong and by not selling everything as a defensive strategy there is no need to be exactly correct about a real recovery.
One interesting little factoid about all of this; The SPX was at 903 when I bought SDS in May for $59.45. Yesterday SPX was at 894 and I bought SDS $58.73. So in about 7 weeks the SPX dropped 1% and SDS dropped 1.2%. The levered funds draw a lot of ire, perhaps rightfully so but the result from SDS in this microcosm has been far from horrible.
Read more!
In early May I bought a half position in SDS thinking the rally had mostly topped out, with a plan at the time to add more on a 5% move in either direction. Then as we got close to a 5% move up, the 200 DMA came down quickly making a purchase of more SDS at that point a little trickier.
The trade yesterday was simply to double up on the amount of SDS purchased in early May taking most clients to somewhere near 2%. There were exceptions here and there so this should be thought of as generally speaking.
For ages I have been thinking there would be one more plunge that would scare the hell out of people and if that happens I like the idea of having a little more SDS and some cash. If we trade narrowly sideways for a while as some feel will happen then this purchase will neither help nor hinder the portfolio. If we whiz higher than the SDS and cash become a drag--a progressively small drag as the market goes up.
I considered not taking any defensive action because despite the recent increase in tech exposure the portfolio typically has gone down less on down days which is the goal after all. If the S&P 500 were to go down to 700 however I would want more protection than what I had before yesterday's trade.
Despite the little bit of heckling over my comments about this sometimes being science and sometimes being art I do think this sort of thing is more art than anything else. While discipline is important, if you have been reading this site for a while then you realize this conversation not about staying disciplined it is about trying to figure the best way through this.
All of the green shoots talk, increasing confidence among many and Hussman's belief that up to this point we have not gone through a revulsion phase leaves me less confident for the near term. However I could be wrong and by not selling everything as a defensive strategy there is no need to be exactly correct about a real recovery.
One interesting little factoid about all of this; The SPX was at 903 when I bought SDS in May for $59.45. Yesterday SPX was at 894 and I bought SDS $58.73. So in about 7 weeks the SPX dropped 1% and SDS dropped 1.2%. The levered funds draw a lot of ire, perhaps rightfully so but the result from SDS in this microcosm has been far from horrible.
Read more!
Tuesday, June 23, 2009
iShares Emerging Markets Infrastructure ETF
I did a write up on the iShares Emerging Markets Infrastructure ETF (EMIF) that is now up at theStreet.com. I usually do not cross promote so shamelessly but I think there has been a lot of interest in this fund. It makes a good impression and hits on several parts of the theme that I think are important. It does have a couple of quirks but don't they all? You can read the article here.
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Tuesday Tidbits
First up a reader asked what I though about the Eaton Vance Risk Managed Diversified Equity Income Fund (ETJ) which is a closed end fund. The reader notes it sells puts and buys puts along with owning common stocks. Aside from a violent spasm last October it has held up well price-wise, dropping 10% in the last year as the S&P 500 has dropped 30%. It seems that most of the time it correlates closely to the broader market. Additionally it yields 10%.
On the surface; not too shabby. These days when I see that type of yield my first inclination is to see how much of the payout was a return of capital. Well according to this the dividend for April was $0.45 of which $0.405 was a return of capital and the rest was net income. Ouch. I did not look back at other dividends to see what portion of past payouts were a returning of capital but maintaining a 10% "yield" is a big bogey for a fund to keep up with. I would not want a lot of exposure to closed end funds who are returning capital to make their payouts.
The Seeking Alpha version of yesterday's post drew an interesting comment. Here's a little taste.
I missed the part about the dividend on the first run through so I stupidly replied by asking what makes an investment. Oh well. The dividend requirement is a new one on me. The important point to make here is this topic brings all sorts of ideas and emotional responses. It is a real hot button issue. I try my best to remove emotion at every turn.
Longtime reader DE left a good comment with a different take on working in some capacity in retirement. He says his goal is to be able to get to the point where he can "pick his busy," meaning he gets to the point where he determines what he does with his time in retirement. He says getting to that point requires that a person "needs to make as much coin and save, save, save in the salad years."
There is a new emerging markets infrastructure ETF out from iShares with ticker EMIF. I have a write up on it into TheStreet.com for sometime this week but it makes a good first impression in terms of what it owns.
Read more!
On the surface; not too shabby. These days when I see that type of yield my first inclination is to see how much of the payout was a return of capital. Well according to this the dividend for April was $0.45 of which $0.405 was a return of capital and the rest was net income. Ouch. I did not look back at other dividends to see what portion of past payouts were a returning of capital but maintaining a 10% "yield" is a big bogey for a fund to keep up with. I would not want a lot of exposure to closed end funds who are returning capital to make their payouts.
The Seeking Alpha version of yesterday's post drew an interesting comment. Here's a little taste.
But unless you get a dividend return, you ARE SPECULATING. The security is a SPECULATION, and you are a SPECULATOR. Bogle and 99.99% of the financial services industry are all confused on the semantics. Apple, Google, and Berkshire Hathaway are all speculations.
I missed the part about the dividend on the first run through so I stupidly replied by asking what makes an investment. Oh well. The dividend requirement is a new one on me. The important point to make here is this topic brings all sorts of ideas and emotional responses. It is a real hot button issue. I try my best to remove emotion at every turn.
Longtime reader DE left a good comment with a different take on working in some capacity in retirement. He says his goal is to be able to get to the point where he can "pick his busy," meaning he gets to the point where he determines what he does with his time in retirement. He says getting to that point requires that a person "needs to make as much coin and save, save, save in the salad years."
There is a new emerging markets infrastructure ETF out from iShares with ticker EMIF. I have a write up on it into TheStreet.com for sometime this week but it makes a good first impression in terms of what it owns.
Read more!
Monday, June 22, 2009
Too Much Speculation?
There's been a lot of Bogle talk lately where he bashed specialty ETFs for being, among other things, tools for speculation. Over-simplifying his view he believes in proper asset allocation and holding cheap, broad-based mutual funds throughout. He seems to label everything else as speculation.
This seemed to prompt a reader to post the following comment;
I gave a short reply and reader Rhianni32 gave a more thoughtful reply. I wanted to delve in a little more this morning.
A question I usually ask truly passive investors is about whether they do any forward looking analysis in their investing--this seemed to be obviously missing from the week long discussion we had here recently about the Permanent Portfolio. The reader's comment goes all over the place but the easy one; a bunch of people "advocate that forward looking analysis is rather challenging." Investing is not a particularly easy endeavor. There are ways to make it a little easier on yourself but I think most people can agree that it is challenging but I would say that buying more stock funds after your equity portfolio has cut in half (IE rebalancing) is also challenging.
As far as looking backward, the reader is not quite right. I describe what I do as taking how things usually work, combine that with what I think is going on now and try to make a forward looking analysis. No market participant can be correct with every decision and knowing that ahead of time is one way to make things a little easier on yourself by not making big bets.
With regard to not preferring broad-based funds, I've written hundreds of posts about using individual stocks and specialty ETFs to manage very specific characteristics of the portfolio. I target things like cap size, style, country weights, sector weights, volatility and yield. It is these decisions where the concept of risk adjusted returns comes into play. Being right about including one country and underweighting one sector can go a long way toward helping returns.
The reader asks how this is not speculation. Well by Bogle's definition it would be. In these sorts of posts I often mention not wanting to be zero weight any sector and not wanting to exceed 20% in any sector. Specifically I tend to be plus or minus a few percent of any sector's weight in the S&P 500. If the industrials currently take up 10% of the S&P 500 would anything between 6% and 14% of a portfolio allocated to that sector be speculation? Again Bogle would say yes. Ok so if this is speculation is it reckless? What would the consequence of being wrong be?
If no more than 5% is in any one stock (I typically don't go more than 3% into one name), and you stray from the index weighting by a couple of percentage points or so is this being reckless (the assumption here is that there is no point in convincing someone it is not speculation)? Any hard core passive investors out there know how Bogle might answer that?
Couldn't an argument be made that holding on to an S&P 500 index fund was reckless when tech grew to 30% of the market nine years ago? In that instance holding an index fund may not have been speculative but it might have been reckless. What is worse, speculation or recklessness?
As I said in my original reply my idea of speculating would be something like whether or not to buy RIMM ahead of an earnings number. This is the sort of thing they talk about on the Fast Money half time report everyday and not my type of trade. That being said I am sure that some people that do trade that way would argue even that is not speculation.
Trying to convince someone else that your idea of investing versus speculating is correct is pointless. What is useful is taking little bits of other peoples' ideas (IE process) on the subject and coming up with your own solution.
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This seemed to prompt a reader to post the following comment;
Hi Roger- a co-worker of mine continues to advocate that any forward looking market analysis is purely speculation and that the likes of Peter Bernstein, Bogle, Harry Browne, William Berntein, Mauldin, etc. advocate that forward looking analysis is rather challenging. attached is a link whereby even Barry Ritholtz admits the same.
I have read where you do not believe in broad based passive products and if I interpret your comments correctly do not like to look backward but attempt to look at te macro picture via a top down sector approach. Please clarify how this approach is not speculation?
I gave a short reply and reader Rhianni32 gave a more thoughtful reply. I wanted to delve in a little more this morning.
A question I usually ask truly passive investors is about whether they do any forward looking analysis in their investing--this seemed to be obviously missing from the week long discussion we had here recently about the Permanent Portfolio. The reader's comment goes all over the place but the easy one; a bunch of people "advocate that forward looking analysis is rather challenging." Investing is not a particularly easy endeavor. There are ways to make it a little easier on yourself but I think most people can agree that it is challenging but I would say that buying more stock funds after your equity portfolio has cut in half (IE rebalancing) is also challenging.
As far as looking backward, the reader is not quite right. I describe what I do as taking how things usually work, combine that with what I think is going on now and try to make a forward looking analysis. No market participant can be correct with every decision and knowing that ahead of time is one way to make things a little easier on yourself by not making big bets.
With regard to not preferring broad-based funds, I've written hundreds of posts about using individual stocks and specialty ETFs to manage very specific characteristics of the portfolio. I target things like cap size, style, country weights, sector weights, volatility and yield. It is these decisions where the concept of risk adjusted returns comes into play. Being right about including one country and underweighting one sector can go a long way toward helping returns.
The reader asks how this is not speculation. Well by Bogle's definition it would be. In these sorts of posts I often mention not wanting to be zero weight any sector and not wanting to exceed 20% in any sector. Specifically I tend to be plus or minus a few percent of any sector's weight in the S&P 500. If the industrials currently take up 10% of the S&P 500 would anything between 6% and 14% of a portfolio allocated to that sector be speculation? Again Bogle would say yes. Ok so if this is speculation is it reckless? What would the consequence of being wrong be?
If no more than 5% is in any one stock (I typically don't go more than 3% into one name), and you stray from the index weighting by a couple of percentage points or so is this being reckless (the assumption here is that there is no point in convincing someone it is not speculation)? Any hard core passive investors out there know how Bogle might answer that?
Couldn't an argument be made that holding on to an S&P 500 index fund was reckless when tech grew to 30% of the market nine years ago? In that instance holding an index fund may not have been speculative but it might have been reckless. What is worse, speculation or recklessness?
As I said in my original reply my idea of speculating would be something like whether or not to buy RIMM ahead of an earnings number. This is the sort of thing they talk about on the Fast Money half time report everyday and not my type of trade. That being said I am sure that some people that do trade that way would argue even that is not speculation.
Trying to convince someone else that your idea of investing versus speculating is correct is pointless. What is useful is taking little bits of other peoples' ideas (IE process) on the subject and coming up with your own solution.
Read more!
Sunday, June 21, 2009
Sunday Morning Coffee
In the last couple of days there's been a real retirement-palooza around the interweb. Unfortunately most of the articles contradict each other. Oops.
First up is an article from Michael Panzner passing a long some gloom about the economic storm that baby boomers find themselves in. Basically a combination of big declines in their portfolios and job loss during peak earnings years will have serious ripples.
US News and World Report (via Yahoo Finance) says to prepare for the end of social security but then the article takes an odd turn about the entitlement programs not being about quid pro quo from one generation to the next but more of a moral obligation that society has to take care of lower income people.
Gene Epstein at Barron's had some good news. He weaved together an argument that the government is too pessimistic in its assumptions about social security running out of money. The combination of boomers working longer and the likelihood that the people working longer will simply be staying in their final job longer--the job they are likely to be making their highest income in which means they are paying in the max to social security. Put another way, fewer people taking out and more people paying in more money.
One of the people interviewed in the Epstein piece was a 68 year old demographer (who obviously still works) who mentioned that his 81 year old sister works full time at the local small town newspaper because she enjoys it so much. I love that story.
Regardless of the reality of when the entitlement programs go into the red or simply go bust a financial plan that overly relies on these payments is probably asking for trouble, well for people below a certain age anyway. I kind of view Epstein's argument, even if it turns out to be correct, as hoping we grow out of the social security problem (not all the way out so much as buy a little more time to figure things out).
This always garners a good conversation but I'm a huge believer in working a long as you can. Aside from relieving some of the burden off of your portfolio it also makes for healthier aging. I don't necessarily advocate working longer in the same job unless you really like that job.
As I've been writing about this stuff for a while another tie in occurred to me. Maybe this will make sense, maybe it won't. One phrase that has come up in the past here is it being about the journey not the destination. In the past I've mentioned that for however much planning or financial modeling you do when you get to the destination (however you define) you have will have X amount of dollars and it will either be enough or it won't.
In that context the exploration for building a second career for yourself that you find fulfilling that you would want to do for a while becomes more about the journey. This part of the journey (the post retirement career) could begin in your pre-retirement career as you start to figure out what you might want to do, then figure out how to do that thing, then start doing that thing and then maybe have some sort of goal for your post retirement career.
If you look at Seeking Alpha it seems like a lot of contributors are folks writing about investing as some sort of post retirement gig as one example. There are plenty of creative ways figure something for yourself.
Part of the potential problem with normal planning is that it focuses too much on the destination and as we have learned there can be so many variables that prevent people from getting to that destination that a reorientation to focusing on the journey instead could help reduce problems that some people will have.
Or not.
Lastly a shout out to reader BillB for being a dog foster. Very cool thing to do.
Read more!
First up is an article from Michael Panzner passing a long some gloom about the economic storm that baby boomers find themselves in. Basically a combination of big declines in their portfolios and job loss during peak earnings years will have serious ripples.
US News and World Report (via Yahoo Finance) says to prepare for the end of social security but then the article takes an odd turn about the entitlement programs not being about quid pro quo from one generation to the next but more of a moral obligation that society has to take care of lower income people.
Gene Epstein at Barron's had some good news. He weaved together an argument that the government is too pessimistic in its assumptions about social security running out of money. The combination of boomers working longer and the likelihood that the people working longer will simply be staying in their final job longer--the job they are likely to be making their highest income in which means they are paying in the max to social security. Put another way, fewer people taking out and more people paying in more money.
One of the people interviewed in the Epstein piece was a 68 year old demographer (who obviously still works) who mentioned that his 81 year old sister works full time at the local small town newspaper because she enjoys it so much. I love that story.
Regardless of the reality of when the entitlement programs go into the red or simply go bust a financial plan that overly relies on these payments is probably asking for trouble, well for people below a certain age anyway. I kind of view Epstein's argument, even if it turns out to be correct, as hoping we grow out of the social security problem (not all the way out so much as buy a little more time to figure things out).
This always garners a good conversation but I'm a huge believer in working a long as you can. Aside from relieving some of the burden off of your portfolio it also makes for healthier aging. I don't necessarily advocate working longer in the same job unless you really like that job.
As I've been writing about this stuff for a while another tie in occurred to me. Maybe this will make sense, maybe it won't. One phrase that has come up in the past here is it being about the journey not the destination. In the past I've mentioned that for however much planning or financial modeling you do when you get to the destination (however you define) you have will have X amount of dollars and it will either be enough or it won't.In that context the exploration for building a second career for yourself that you find fulfilling that you would want to do for a while becomes more about the journey. This part of the journey (the post retirement career) could begin in your pre-retirement career as you start to figure out what you might want to do, then figure out how to do that thing, then start doing that thing and then maybe have some sort of goal for your post retirement career.
If you look at Seeking Alpha it seems like a lot of contributors are folks writing about investing as some sort of post retirement gig as one example. There are plenty of creative ways figure something for yourself.
Part of the potential problem with normal planning is that it focuses too much on the destination and as we have learned there can be so many variables that prevent people from getting to that destination that a reorientation to focusing on the journey instead could help reduce problems that some people will have.
Or not.
Lastly a shout out to reader BillB for being a dog foster. Very cool thing to do.
Read more!
Saturday, June 20, 2009
Friday, June 19, 2009
Bailout Nation Review
Trying something new with the posting so bear with me.
Well I finally got around to reading Bailout Nation. If you want to save some time this morning then just go buy the book, read it and then plan on reading again in six months. If you want some color from me on why I think you should read the book then keep reading this post.
As far the general tone of the book, remember you are reading what will be viewed as a reference piece of what happened, it reads very easily and very familiarly for anyone who usually reads Barry's blog.
One thing that struck me is how many moving parts there were to this and how they each had their seat at the table contributing to the blow up. When was the last time you thought about SIVs? They were front-page important for a while there and now you probably go weeks without thinking about them. How much do remember about Indymac and what a huge player it was? How the hell could Fannie and Freddie blow up like that? Fannie and Freddie. Do you really know how insidious the entire AIG saga is?
I like that Barry goes out of his way to point readers to other references for more detail on quite a few subjects--this contributes to the blog like feel of the book. Barry chronicled most of this as it occurred so it was easy to draw from that writing to cull the book together, point being that it captures what was happening at each step along the way instead of trying to piece it together with third party info.
Barry draws many conclusions and offers a lot in the way of possible solutions. I did not necessarily agree with every conclusion however. For example Barry does not think the Community Reinvestment Act played a role in the meltdown and he thinks arguments that it did are misinformed. His argument is quite sound because as he says CRA didn't force banks to lend money to people who had no shot of paying it back. No argument.
I'm not going to out debate Barry on anything except maybe fire suppression tactics or Red Sox trivia but WRT to the CRA argument I would wonder (and to be clear I do not know the answer, just asking the question) what sort of environment CRA contributed to creating in terms of some sort of suasion that may have existed.
The question is subtle, I don't think was addressed in the book and could be a non starter but there was a collective consciousness at play and it is possible that CRA contributed to it. I don't know the answer but at one point in the book Barry talks about minorities generally getting hosed because of redlining and there have been many accounts of those folks getting hosed on mortgages. The two might be connected.
Page 232 lists who is most to blame and number one on the list in Alan Greenspan of whom Barry says "history will not be kind to the Maestro."
There was a nitty gritty accounting if just about all the major players and institutions throughout the book to the point of being funny and sad at the same time.
There was quite a bit of humor in the book, there were several instances where I literally laughed out loud. I'll close out the same way I started; get the book and read it. You will know more about what happened than you do now.
Read more!
Well I finally got around to reading Bailout Nation. If you want to save some time this morning then just go buy the book, read it and then plan on reading again in six months. If you want some color from me on why I think you should read the book then keep reading this post.
As far the general tone of the book, remember you are reading what will be viewed as a reference piece of what happened, it reads very easily and very familiarly for anyone who usually reads Barry's blog.
One thing that struck me is how many moving parts there were to this and how they each had their seat at the table contributing to the blow up. When was the last time you thought about SIVs? They were front-page important for a while there and now you probably go weeks without thinking about them. How much do remember about Indymac and what a huge player it was? How the hell could Fannie and Freddie blow up like that? Fannie and Freddie. Do you really know how insidious the entire AIG saga is?
I like that Barry goes out of his way to point readers to other references for more detail on quite a few subjects--this contributes to the blog like feel of the book. Barry chronicled most of this as it occurred so it was easy to draw from that writing to cull the book together, point being that it captures what was happening at each step along the way instead of trying to piece it together with third party info.
Barry draws many conclusions and offers a lot in the way of possible solutions. I did not necessarily agree with every conclusion however. For example Barry does not think the Community Reinvestment Act played a role in the meltdown and he thinks arguments that it did are misinformed. His argument is quite sound because as he says CRA didn't force banks to lend money to people who had no shot of paying it back. No argument.
I'm not going to out debate Barry on anything except maybe fire suppression tactics or Red Sox trivia but WRT to the CRA argument I would wonder (and to be clear I do not know the answer, just asking the question) what sort of environment CRA contributed to creating in terms of some sort of suasion that may have existed.The question is subtle, I don't think was addressed in the book and could be a non starter but there was a collective consciousness at play and it is possible that CRA contributed to it. I don't know the answer but at one point in the book Barry talks about minorities generally getting hosed because of redlining and there have been many accounts of those folks getting hosed on mortgages. The two might be connected.
Page 232 lists who is most to blame and number one on the list in Alan Greenspan of whom Barry says "history will not be kind to the Maestro."
There was a nitty gritty accounting if just about all the major players and institutions throughout the book to the point of being funny and sad at the same time.
There was quite a bit of humor in the book, there were several instances where I literally laughed out loud. I'll close out the same way I started; get the book and read it. You will know more about what happened than you do now.
Read more!
Thursday, June 18, 2009
Who Is Looking Out For You?
An interesting couple of comments popped up on a post at Seeking Alpha by Felix Salmon about recent comments from Jack Bogle about ETFs. One reader said about actively managed funds "And where were the fund managers whom I'd counted on to protect my capital and outperform the market?" Ron Rowland (keeper of the ETF Deathwatch) correctly set him straight.
This is an education issue that I have touched on before. When an investor buys an actively managed mutual fund or goes through a broker who hires managers, in both instances the managers must assume that the asset allocation decisions have been made. It is right and reasonable for a small cap manager in the context above to be more than 97% invested at all times. A small cap fund needs to be a proxy for small cap stocks regardless of the direction and magnitude those stocks take. Fund managers and managers of separate accounts in brokerage house programs are not asset allocators that falls on you or your broker.
That sort of ignorance is disappointing, disheartening but also a learning opportunity. It is a reminder that people very often invest in things they do not quite understand. This applies to do-it-yourselfers in their 401Ks all the way through to "sophisticated" pools of capital buying some sort of mortgage debt that turned out to be toxic.
As for Bogle's assertion that ETF investors are getting killed, I find it is useless. I'll leave questioning of the data to Felix and just say that human behavior causes investors to lag mutual funds. This has been the case for ages (always?) and so if true of ETFs, is no different than any other sort of fund. People get killed in treasuries occasionally too. The price of any asset can go down a lot and the human response to that could compound that problem, ditto buying high.
I would think that if you asked indexers who have hung on all they way through this and rebalanced at whatever interval Bogle would think prudent many of them would say they have been killed in this market. Bogle has admitted in past TV appearances that it is the behavior, as opposed to the product, that causes the most problems for people yet he continues to rail against the products. One quote from him "...you’re talking about 18% of investor capital that’s been lost by all this trading.” So people may be bad traders, what does that have to do with ETFs? Bad traders have been around longer than Bogle has. If they get rid of all the ETFs today bad traders will have figured out how to lose money with other tools by the open tomorrow.
We had an unusual call into the fire department yesterday for a Public Assist. A stallion got his legs caught in the bottom of the fence because the mare in the next chute over had gone into heat and he was all worked up. The stallion went down, couldn't figure out how to get is legs untangled and was very distressed.
The owner called 911 a second time saying how freaked out the horse was so on the second call I told dispatch to call animal control expecting there would be nothing that the other firefighter I would be able to do. But when we got there the owner had one rope around his back half and another around is neck. We jumped in there with him, each grabbed a rope and pulled. Pulling out and rolling him over was much easier than I would have expected but there we were in the chute with a (formerly?) distressed stallion so we jumped the hell out of there and all was well.
Fortunately the night before I had watched a few minutes of the movie Junior Bonner, a modern day cowboy movie starring Steve McQueen from 1972 that was filmed here in Prescott. The picture is my favorite scene from the movie (ahem) at the old train station that more recently was an AG Edwards office (free Lenny Dykstra coaster to anyone who can remember who bought that firm) but now is vacant.
Read more!
This is an education issue that I have touched on before. When an investor buys an actively managed mutual fund or goes through a broker who hires managers, in both instances the managers must assume that the asset allocation decisions have been made. It is right and reasonable for a small cap manager in the context above to be more than 97% invested at all times. A small cap fund needs to be a proxy for small cap stocks regardless of the direction and magnitude those stocks take. Fund managers and managers of separate accounts in brokerage house programs are not asset allocators that falls on you or your broker.
That sort of ignorance is disappointing, disheartening but also a learning opportunity. It is a reminder that people very often invest in things they do not quite understand. This applies to do-it-yourselfers in their 401Ks all the way through to "sophisticated" pools of capital buying some sort of mortgage debt that turned out to be toxic.
As for Bogle's assertion that ETF investors are getting killed, I find it is useless. I'll leave questioning of the data to Felix and just say that human behavior causes investors to lag mutual funds. This has been the case for ages (always?) and so if true of ETFs, is no different than any other sort of fund. People get killed in treasuries occasionally too. The price of any asset can go down a lot and the human response to that could compound that problem, ditto buying high.
I would think that if you asked indexers who have hung on all they way through this and rebalanced at whatever interval Bogle would think prudent many of them would say they have been killed in this market. Bogle has admitted in past TV appearances that it is the behavior, as opposed to the product, that causes the most problems for people yet he continues to rail against the products. One quote from him "...you’re talking about 18% of investor capital that’s been lost by all this trading.” So people may be bad traders, what does that have to do with ETFs? Bad traders have been around longer than Bogle has. If they get rid of all the ETFs today bad traders will have figured out how to lose money with other tools by the open tomorrow.
We had an unusual call into the fire department yesterday for a Public Assist. A stallion got his legs caught in the bottom of the fence because the mare in the next chute over had gone into heat and he was all worked up. The stallion went down, couldn't figure out how to get is legs untangled and was very distressed.The owner called 911 a second time saying how freaked out the horse was so on the second call I told dispatch to call animal control expecting there would be nothing that the other firefighter I would be able to do. But when we got there the owner had one rope around his back half and another around is neck. We jumped in there with him, each grabbed a rope and pulled. Pulling out and rolling him over was much easier than I would have expected but there we were in the chute with a (formerly?) distressed stallion so we jumped the hell out of there and all was well.
Fortunately the night before I had watched a few minutes of the movie Junior Bonner, a modern day cowboy movie starring Steve McQueen from 1972 that was filmed here in Prescott. The picture is my favorite scene from the movie (ahem) at the old train station that more recently was an AG Edwards office (free Lenny Dykstra coaster to anyone who can remember who bought that firm) but now is vacant.
Read more!
Wednesday, June 17, 2009
100 Shares of Iraq Bell?
I meant to get to this earlier but a company called Auerbach Grayson is going to be the first US firm to offer access to equities from Iraq to institutional investors.While I have no interest in Iraq anytime soon and doubt our firm would meet whatever definition they are using for institutional investor it is still an interesting development.
I found this on Alphaville which linked to another FT story with a little more detail.
The exchange figures to be fully electronic by the end of June, the Iraqi market is 60% financials (repeat theme: every country has a big bank or two). I was able to link through to a page that tells the schedule for moving Iraqi stocks to electronic trading and while I do not know if the list of companies is comprehensive or not it is interesting to look at.
As you think about Iraq, what do they need? Where is money very likely to be spent? I would think food, healthcare and rebuilding things (it would seem they will continue to outsource a lot of their security needs for a while). Included in the first batch of stocks to move to the electronic platform includes Iraqi Agricultural Products Marketing, National Food Industries, Fallujah Construction Materials and Iraqi for Seed Production. The second batch is mostly financial stocks but also Al-Mansour Pharmaceuticals Industries. I also saw a bicycle company, sewing company and a rug company in the listings.
Auerbach Grayson will be providing research on Iraqi companies to its clients but I think it would be much easier for them to offer some sort of index fund (maybe they will) to its clients instead, would it be truly shocking to find out that the Al-Ayam Financial Investment (real company) turned out to be headquartered on the wrong street corner (made up example)?. An extreme outcome (either up 1000% or complete eradication) is probably a good bet.
The observations above about money being spent on food and healthcare etc are fairly obvious, even if not complete; the money is going to be spent. That does not have to mean that the stocks do well for all sorts of reasons that could be topdown, bottom up or both.
Again, I'm not looking to buy into Iraq but this market, as will be the case with others, will open to US investors in the future. It doesn't hurt to see what comprises a new (to you) market and spend a few minutes learning you are unlikely to buy a certain country because you will increase your general knowledge and occasionally you will find a market that you do want to invest in.
The picture is from the Prescott Animal Control where my wife goes often in the context of doing her animal rescue work. She finally figured out how to get this picture from her phone to the computer. I think it is an amazing picture.
Read more!
Tuesday, June 16, 2009
Tuesday Tidbits
First up, IndexUniverse is reporting that Claymore filed for an ETF that would own single country ETFs selected, presumably, in a top down process overseen by Art Laffer's company. Claymore already has one of these, sort of, with the Claymore Zachs Country Rotation Fund (CRO) but it uses individual stocks to build the country weights. I suppose the Laffer idea could be interesting in the context here of late that going with a broad-based fund heavy in Japan and big Western Europe may not be a great way to capture foreign.
The one thing is that I seem to recall is Laffer having a little trouble seeing the worst financial crisis since the great depression ahead of time. Do I have that right? If so is he the best person to make macro calls on individual countries?
There was another comment from Sunday's post that I wanted to reply to. The reader says that any professional attempt to recreate the permanent portfolio would lag the pure strategy by at least the management fee unless the manager took "excessive" risk. Excessive could be strictly thought of as doing anything beyond the specifics of the strategy or a little more loosely. A decision to shorten or lengthen bond maturity could add some return as could some sort of decision about foreign exposure for the equity portion. By strict definition that is excessive risk but in the context of trying to learn from the concept it seems like fair game.
Bespoke Investment Group put out a note to subscribers about the impending crossover of the 50 DMA above the 200 DMA. According to their data the declining 200 DMA is not necessarily a negative here, in fact they say that the average return in the six months following a crossover the average gain has been 6.17%. They report 11 instances of a crossover while the 200 DMA was declining; after the first three the market declined each time but in the eight times since it has gone up.
This study contributes to the idea that bull markets start quietly and are met with skepticism. How bullish are you? I'm not bullish but I did increase exposure a couple of weeks ago.
Read more!
The one thing is that I seem to recall is Laffer having a little trouble seeing the worst financial crisis since the great depression ahead of time. Do I have that right? If so is he the best person to make macro calls on individual countries?
There was another comment from Sunday's post that I wanted to reply to. The reader says that any professional attempt to recreate the permanent portfolio would lag the pure strategy by at least the management fee unless the manager took "excessive" risk. Excessive could be strictly thought of as doing anything beyond the specifics of the strategy or a little more loosely. A decision to shorten or lengthen bond maturity could add some return as could some sort of decision about foreign exposure for the equity portion. By strict definition that is excessive risk but in the context of trying to learn from the concept it seems like fair game.
Bespoke Investment Group put out a note to subscribers about the impending crossover of the 50 DMA above the 200 DMA. According to their data the declining 200 DMA is not necessarily a negative here, in fact they say that the average return in the six months following a crossover the average gain has been 6.17%. They report 11 instances of a crossover while the 200 DMA was declining; after the first three the market declined each time but in the eight times since it has gone up.
This study contributes to the idea that bull markets start quietly and are met with skepticism. How bullish are you? I'm not bullish but I did increase exposure a couple of weeks ago.
Read more!
Monday, June 15, 2009
Answer To A Reader Queston
On yesterday's post a reader asked;
I have never been 100% on board with efficient market hypothesis. The market usually is right it seems but when it is wrong it coincides with declines of biblical proportions (I said pretty much this exact thing on GreenFaucet on Thursday).
In the comment the reader says nothing about forward looking analysis. Do he do any? Do he believe in forward looking analysis? Not being a wise guy, I don't think passive investors who use broad based products do forward looking analysis and they do fine most of the time except in years like 2008.
The reader mentions "forecast the future." That is not how I look at it. You do an anlaysis, draw a conclusion, know not every conclusion can be correct and be prepared to take action when you are wrong.
Back to broad based foreign products; Japan has an inordinate amount of debt. It has more than the US, in terms of GDP. We produce a big chunk of our resource needs, Japan essentially none.
The details and prospects for big Western Europe aren't any better. It may be worse than the US. Looking forward it is difficult to build a strong case for going heavy in these places. On the other hand I can build a very good case for many other countries.
The issue then becomes whether my opinion about the countries I favor will turn out to be correct or not (bigger picture or course the question is does country selection work, and I believe it does). It either will or it won't. Thus far the countries I favor have done better. That will either continue or it won't.
Understand that in trying to build a diversified portfolio I am trying to emphasize countries with different fundamental attributes than the US. It is those countries that give the better chance of a zigzag effect which is what I think diversification is all about. Following that line of thinking a lot of exposure to Western Europe is not called for and the way I think of things Japan would be out too. I will say that I am intrigued by a couple of the railway stocks in Japan have not bought any.
I have been writing about the same general mix of countries for years. They include China, Chile, Brazil, Australia, Norway and Canada. Each has attributes that are generally different from the US but none are risk free either. I'm sure they will continue to have different economic attributes for decades to come. This may not always lead to better investment results but for most of the current decade it has meant better results and I think that will continue for a little while. I do have a little bit of exposure to Western Europe but less than I did a year or two ago. I blogged in the past about selling BP a couple of years ago, selling Barclays (BCS) in December 2007, and I think I mentioned selling Telefonica (TEF) when I swapped into China Mobile (CHL).
At some point most of the things that appear to be rotten investments today will become attractive again. Obviously I hope to be able to generally figure that out and like anyone who invests at the country level I'll either get it right or not but either way at some point Western Europe becomes attractive and maybe even Japan.
Over the last few years the difference in returns available by seeking out specific countries has been dramatic but I also think it is been fairly easy to spot. I know that some investors will never invest down to the county level, I know their argument, I just don't agree with it.
Read more!
You have indicated that you do not like broad based indices like the EFA which has high exposure to Japan and questioned why one would want exposure to this country.
Question for you: Do you believe that the markets have priced all known public knowledge and that it is quite challenging to forecast the future? If so, why would you now want to invest in a broad based fund? If not, how can you forecast the unknown and make a determination to avoid a country like Japan, amongst others?
I have never been 100% on board with efficient market hypothesis. The market usually is right it seems but when it is wrong it coincides with declines of biblical proportions (I said pretty much this exact thing on GreenFaucet on Thursday).
In the comment the reader says nothing about forward looking analysis. Do he do any? Do he believe in forward looking analysis? Not being a wise guy, I don't think passive investors who use broad based products do forward looking analysis and they do fine most of the time except in years like 2008.
The reader mentions "forecast the future." That is not how I look at it. You do an anlaysis, draw a conclusion, know not every conclusion can be correct and be prepared to take action when you are wrong.
Back to broad based foreign products; Japan has an inordinate amount of debt. It has more than the US, in terms of GDP. We produce a big chunk of our resource needs, Japan essentially none.
The details and prospects for big Western Europe aren't any better. It may be worse than the US. Looking forward it is difficult to build a strong case for going heavy in these places. On the other hand I can build a very good case for many other countries.
The issue then becomes whether my opinion about the countries I favor will turn out to be correct or not (bigger picture or course the question is does country selection work, and I believe it does). It either will or it won't. Thus far the countries I favor have done better. That will either continue or it won't.
Understand that in trying to build a diversified portfolio I am trying to emphasize countries with different fundamental attributes than the US. It is those countries that give the better chance of a zigzag effect which is what I think diversification is all about. Following that line of thinking a lot of exposure to Western Europe is not called for and the way I think of things Japan would be out too. I will say that I am intrigued by a couple of the railway stocks in Japan have not bought any.
I have been writing about the same general mix of countries for years. They include China, Chile, Brazil, Australia, Norway and Canada. Each has attributes that are generally different from the US but none are risk free either. I'm sure they will continue to have different economic attributes for decades to come. This may not always lead to better investment results but for most of the current decade it has meant better results and I think that will continue for a little while. I do have a little bit of exposure to Western Europe but less than I did a year or two ago. I blogged in the past about selling BP a couple of years ago, selling Barclays (BCS) in December 2007, and I think I mentioned selling Telefonica (TEF) when I swapped into China Mobile (CHL).
At some point most of the things that appear to be rotten investments today will become attractive again. Obviously I hope to be able to generally figure that out and like anyone who invests at the country level I'll either get it right or not but either way at some point Western Europe becomes attractive and maybe even Japan.
Over the last few years the difference in returns available by seeking out specific countries has been dramatic but I also think it is been fairly easy to spot. I know that some investors will never invest down to the county level, I know their argument, I just don't agree with it.
Read more!
Sunday, June 14, 2009
Sunday Morning Coffee
Geoff Considine had a very lengthy post up at Seeking Alpha called Stress Testing Your Portfolio which drew some interesting comments. Geoff has been submitting content to Seeking Alpha as long as I have, maybe longer. His articles have tremendous depth and he gets very high praise, notably from Phil DeMuth.
I tend to view just about everything related to portfolio construction and market navigation differently than my perception of how Geoff views things. As a result I must confess only skimming the above article (it's gotta be more than 2000 words).
The article starts off talking about the merits of Monte Carlo Simulations (and the like) and then those merits get jumped on in the comments. I have never been a fan of simulations. A theme that should be apparent to long time readers is that I do not like to rely on things that should work. There are just too many potential variables between theory and reality.
Ultimately when you are 78 or any other age you have whatever amount of money you have, you have either generally benefited from or been hurt by whatever decisions you have made, you have had some combo of good and bad luck and your situation is what it is. Probabilities that some model spit out 30 years earlier mean nothing today.
Who doesn't know what does people in? Some combination of poor spending habits, poor investments decisions and bad luck is the culprit to many a failed financial plan. Emotions like hubris and panic are often involved in the first two and bad financial luck can be partially offset by accumulating a bigger emergency fund.
Is there anyone who doesn't know they should spend as little as possible, not panic sell, exercise (don't drink soda!) and work longer than they might have originally wanted to? Again there are a lot of variables between the theory of people knowing these things and reality of people heeding these things. The difference is that spending, not panicking, exercising and working are within your control (working being a possible exception) whereas this financial crisis occurring when you are 35 versus 65 is not within your control.
One particularly critical commenter of the Considine piece spoke out about the (obvious) need to be out of the stock market occasionally. Clearly I would agree with this line of thinking. My goal with this has been the same all along and I believe quite simple. When the market seems to be at greater risk of going down a lot (when it breaches its 200 DMA) I am hoping to go down less. That is it, just go down less.
In thinking of the entire stock market cycle, after the typical bull bear phase the market will be some percent higher then the end of the last full stock market cycle. If you simply go along for the ride on the way up (capturing most of the effect) and go down less on the retracement you will either have better returns over the entire cycle or simply smooth out the ride for yourself or both.
Perhaps I am making sound easier than it is but long time readers have had a front row seat to this here during the current cycle and again this behavior is within your control whereas the great market meltdown of 2040 will not be (we seem to go 30-40 years between great market meltdowns).
The bigger macro is the attempt to avoid being in situations where you increase the likelihood of trouble. Again not all of this is in your control; a combo of needing a new roof, a new car and serious dental work all at the same time can happen to anyone at anytime but does anyone have to buy a new 42 foot Power Cruiser and three jet skis to go with when they turn 62?
Read more!
I tend to view just about everything related to portfolio construction and market navigation differently than my perception of how Geoff views things. As a result I must confess only skimming the above article (it's gotta be more than 2000 words).
The article starts off talking about the merits of Monte Carlo Simulations (and the like) and then those merits get jumped on in the comments. I have never been a fan of simulations. A theme that should be apparent to long time readers is that I do not like to rely on things that should work. There are just too many potential variables between theory and reality.
Ultimately when you are 78 or any other age you have whatever amount of money you have, you have either generally benefited from or been hurt by whatever decisions you have made, you have had some combo of good and bad luck and your situation is what it is. Probabilities that some model spit out 30 years earlier mean nothing today.
Who doesn't know what does people in? Some combination of poor spending habits, poor investments decisions and bad luck is the culprit to many a failed financial plan. Emotions like hubris and panic are often involved in the first two and bad financial luck can be partially offset by accumulating a bigger emergency fund.
Is there anyone who doesn't know they should spend as little as possible, not panic sell, exercise (don't drink soda!) and work longer than they might have originally wanted to? Again there are a lot of variables between the theory of people knowing these things and reality of people heeding these things. The difference is that spending, not panicking, exercising and working are within your control (working being a possible exception) whereas this financial crisis occurring when you are 35 versus 65 is not within your control.
One particularly critical commenter of the Considine piece spoke out about the (obvious) need to be out of the stock market occasionally. Clearly I would agree with this line of thinking. My goal with this has been the same all along and I believe quite simple. When the market seems to be at greater risk of going down a lot (when it breaches its 200 DMA) I am hoping to go down less. That is it, just go down less.
In thinking of the entire stock market cycle, after the typical bull bear phase the market will be some percent higher then the end of the last full stock market cycle. If you simply go along for the ride on the way up (capturing most of the effect) and go down less on the retracement you will either have better returns over the entire cycle or simply smooth out the ride for yourself or both.
Perhaps I am making sound easier than it is but long time readers have had a front row seat to this here during the current cycle and again this behavior is within your control whereas the great market meltdown of 2040 will not be (we seem to go 30-40 years between great market meltdowns).
The bigger macro is the attempt to avoid being in situations where you increase the likelihood of trouble. Again not all of this is in your control; a combo of needing a new roof, a new car and serious dental work all at the same time can happen to anyone at anytime but does anyone have to buy a new 42 foot Power Cruiser and three jet skis to go with when they turn 62?
Read more!
Saturday, June 13, 2009
The Big Picture for the Week of June 14, 2009
No video this week.
Well the fascination continues. We have dissected many aspects of the permanent portfolio and compared it to a few things including work done by Larry Swedroe (I found that comparison to be very interesting). Then late yesterday one reader commented that "Swedroe's port feels like Taleb has influenced his thinking."
Interesting. I have no idea whether the comment is true or not and I won't try to guess whether it is true but it makes for an interesting talking point. An accomplished and renowned thinker being influenced by another accomplished and renowned thinker.
I've written many posts about Taleb. I believe he has influenced my thinking some. I had long been aware of the concept of a few holdings doing a lot of heavy lifting for the entire portfolio (this is merely a different way of expressing put 90% in t-bills and go for broke with the other 10%). As this decade has been truly awful in terms of equity market returns Taleb's thoughts have garnered more attention.
All of these ideas about constructing a portfolio to go down less but still protect against inflation somehow are very intellectually appealing to people, hence the incredible amount of reader comments on the subject over the last week, but this idea does not complete the discussion.
If you are looking for a different way to do things then you must explore the possibility that you have been influenced by whatever amount you dropped during this bear market. Big changes that involve owning far fewer equities while the S&P 500 is still down 40% from its peak stands to be problematic.
At some point the market will roar again (maybe it is doing so now) and peoples apprehensions will fall by the wayside and just as people will have too little equity exposure at SPX 900 they will have too much exposure at SPX 2000 or SPX 3000 or wherever the next excess takes us. Hopefully people recognize this in themselves and others and can learn from it.
I tried to convey how while the details causing the decline may have been unique that the market dropped a lot was not unprecedented and will happen again in another episode. A lot of the writing here has been focused on trying to be more proactive (get defensive when the market goes below its 200 DMA, which occurred in December 2007) than reactive. One thing I have observed in too many places as the bear market was starting in 2007 and then all the way through is the general reactive nature of how people navigate these events.
A comment I made many times is how waking up one day, realizing you're down 40% and then asking now what do I do is a very bad place to be.
Read more!
Well the fascination continues. We have dissected many aspects of the permanent portfolio and compared it to a few things including work done by Larry Swedroe (I found that comparison to be very interesting). Then late yesterday one reader commented that "Swedroe's port feels like Taleb has influenced his thinking."
Interesting. I have no idea whether the comment is true or not and I won't try to guess whether it is true but it makes for an interesting talking point. An accomplished and renowned thinker being influenced by another accomplished and renowned thinker.
I've written many posts about Taleb. I believe he has influenced my thinking some. I had long been aware of the concept of a few holdings doing a lot of heavy lifting for the entire portfolio (this is merely a different way of expressing put 90% in t-bills and go for broke with the other 10%). As this decade has been truly awful in terms of equity market returns Taleb's thoughts have garnered more attention.
All of these ideas about constructing a portfolio to go down less but still protect against inflation somehow are very intellectually appealing to people, hence the incredible amount of reader comments on the subject over the last week, but this idea does not complete the discussion.
If you are looking for a different way to do things then you must explore the possibility that you have been influenced by whatever amount you dropped during this bear market. Big changes that involve owning far fewer equities while the S&P 500 is still down 40% from its peak stands to be problematic.
At some point the market will roar again (maybe it is doing so now) and peoples apprehensions will fall by the wayside and just as people will have too little equity exposure at SPX 900 they will have too much exposure at SPX 2000 or SPX 3000 or wherever the next excess takes us. Hopefully people recognize this in themselves and others and can learn from it.
I tried to convey how while the details causing the decline may have been unique that the market dropped a lot was not unprecedented and will happen again in another episode. A lot of the writing here has been focused on trying to be more proactive (get defensive when the market goes below its 200 DMA, which occurred in December 2007) than reactive. One thing I have observed in too many places as the bear market was starting in 2007 and then all the way through is the general reactive nature of how people navigate these events.
A comment I made many times is how waking up one day, realizing you're down 40% and then asking now what do I do is a very bad place to be.
Read more!
Friday, June 12, 2009
Priorities
A short departure for today.We had a helluva scare yesterday with two of the little dogs. Everyone is fine and accounted for but it was a legitimate freak out for about 40 minutes.
Everyone has their own priorities but hopefully your money is not priority number one or priority number two. Hopefully it is a couple of pegs lower than that even.
In my absence maybe there can be some follow through on a discussion that started late yesterday. The Permanent Portfolio would seem to be the opposite of what the endowments are trying to do, or are they?
How are they different, how are they similar and what can you pull from both for your portfolio?
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Thursday, June 11, 2009
Stray Bits for a Thursday
RGE Monitor has done some in depth coverage on Latvia comparing it to Thailand in 1997 with the implication that as Thailand's baht crisis became the world's problem so too might Latvia become the world's problem. I got this via email and tried to find it on the site but had no luck (apologies).I first wrote about Latvia possibly being in trouble a couple of years ago and have written about it several times lately at GreenFaucet. I never made the Thailand comparison but there is obviously at least a little something there. Several more developed European countries have exposure in Latvia specifically and the region more generally most notably Sweden in Latvia an Austria everywhere.
As the world has learned most of these countries, both the lenders and borrowers, are fairly small and the banks became enormous relative to their respective countries which never mattered until the music stopped. It is tough to say what the real impact of a Latvian blow up would mean and how it would compare to Thailand or for that matter Iceland. Clearly Iceland caused trouble for the UK and for now we may not know the full consequence of that. We have a sense of some countries are threatened by Latvia but do we know them all?
One difference between Thailand and Latvia is that Thailand was an easily accessible investment destination in the US long before 1997 via closed end funds. There are no Latvian funds or stocks available in the US. Not that US investability is the be all end all I believe it is correct to say that Thailand had a much bigger role in the world economic order in 1997 than Latvia does today.
Some bigger picture context that I have touched on before with this stuff is trying to follow certain countries in case they end up mattering for some reason. Clearly Latvia matter more than it used to even if the reasons are negative and I guess for some reason Latvia resonated with me so I wrote about it, maybe it was having seen Artūrs Irbe in the Olympics a few months earlier?
As the Permanent/Lazy Portfolio debate raged on in yesterday's comments long time reader Stephen Drone left a link to a discussion at Bogleheads about a portfolio concept attributed to Larry Swedroe that caught my attention. So I don't get in trouble let me say I did not find where Swedroe put the following forth but I saw a question about it directed at Swedroe that Swedroe answered without saying "no I never talked about that allocation mix" but he also was not specific an talking about it either so with that in mind....
70% TIPS
5% Collateralized Commodities Futures (hat tip annonymous commenter)
25% Small Cap Value
This is mostly going to be a low impact portfolio. It will go up less than the broad market in a raging bull phase but the drawdown in a decline should also be much less. Commodities, however they are accessed should zig the US equity market's zag but this will not be true 100% of the time second half 2008 as an example). Small cap value tends to be the best performing style box over long periods of time so the allocation there gives a bang for the buck over large cap effect. The TIPS weighting would seem to communicate an obvious concern about price inflation.
It seems to me that this is potentially a very sophisticated concept. I believe it tries to capture some very nuanced effects which is not easy using broad based products. It is not clear to me if Swedroe would include foreign stocks in with small cap value. As a side note there are ETFs that cover foreign-developed small cap and at least one that covers emerging market small cap (note these are not necessarily small cap value), there may be OEFs to over this space but am not sure what those would be.
While I am not a fan of lazy portfolios and the like I am a big fan of seeking out subtle effects on a portfolio. By subtle effect I mean managing things like average market cap, style, yield, volatility and so on. It is much easier to do this using narrower products like individual stocks, sector ETFs and theme or sub-sector ETFs.
The pictures; A FaceBook friend became a fan of the Ford Country Squire and I fell over laughing when I saw it. The picture above has it all; the desert, an Airstream and a red stationwagon the size of Delaware! When I was a kid we had the Chevy version of this. It was so big that my dad could hit fly balls for me to shag in the back of it. My childhood friend Doug Stocklan's parents had a Country Squire that I think was blue.The second picture is Ricky Gervais on the left and ESPN announcer Dave O'Brien on the right. Am I the only one who thinks they look alike?
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Wednesday, June 10, 2009
Mr. Forest, meet Mr. Tree
A great discussion broke out yesterday in the comments about the merits of the Permanent Portfolio concept which has been a bit of a hot topic here of late. I wrote about this on Saturday and you can check also check out yesterday's comments here if you are so inclined.
A little later in the day one reader asked whether something like Larry Swedroe's portfolio concept of what the reader described as "using low correlated equity sectors such as 12.5% in US small value and 12.5% in international small value and 70% in short term treasuries" might be the answer. The reader said the return and volatility numbers would be very compelling.
As an administrative note the reader did not leave a link and I'm sorry for not taking the time to find an article by Swedroe on this. I don't know if the reader has his facts correct or not which will not be important for the direction I take with this post but you will enhance the conversation if you provide a link to go with your comment when a link is appropriate like with referencing someone else's work.
In the post on Saturday I talked about one reason I choose not to go with a permanent portfolio is that I believe the (investing) world continually evolves. That which worked for one period of time may not work for a different period of time. Another aspect of this that came to me as I read the Swedroe comment is the notion of complete reliance on something that should work because...
I'm not taking a poke at the permanent portfolio but generally speaking when did Browne come up with it? Was it the 1970s (really don't know)? How much has the world changed since Browne had the idea? How much do you suppose it will change in the next 30 years? It certainly could continue to work in the future but a lot of things malfunctioned in this bear market so why couldn't there be some combination of events that causes the permanent portfolio to malfunction? Complete denial of even the possibility is not well advised.
As a simpler example from this bear market; one strategy that should work is rotating into value stocks (or funds) later in the stock market cycle. The businesses tend to be more mature, obviously the valuations are cheaper and value stocks generally yield more than growth stocks. This worked in the last bear market as growthier funds were heavy in tech so people assumed it would work in this bear market.
Just as growth funds were heavy in tech nine years ago value funds were heavy in financial stocks one and half years ago so many value funds (also similar dividend-centric funds) got crushed in this bear market worse than the S&P 500.
This gets us to the title of this post. Over-reliance on something that should have worked ended up hurting people. There was a failure to see the forest which was that something was very wrong with financial stocks. This was not difficult to see from a big picture standpoint. I was on this very early in terms of there being trouble but never was correct about the magnitude but there was no need to be correct about the magnitude. "Trouble is coming for financials so I better be underweight" is easily copied. Being underweight means looking under the hood of your funds, if you use funds, and adding up the exposure to the thing you want to be underweight then selling to get to where you want to be.
Reliance on and utilization of market truthisms is perfectly valid but blind trust without verifying makes no sense to me at all. Before someone gets on me about blind faith in the 200 DMA, well we went above it a week or two ago and so far I've only bought one ETF, still have a lot of cash and a tiny little bit of SDS. Blind devotion would have me all in already.
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Tuesday, June 09, 2009
Jeremy's Spoken
If you've ever been a fan of Grunge Music then the title of this post might make sense to you.Naked Capitalism links to 20 minutes worth of Jeremy Grantham interview. Along with the video is a little bit of commentary (did not watch the video did read the little bit of commentary).
On dipping a toe back into the market – and how a lot of people missed the huge surge in equities. “It’s a very uncertain world... But you can’t risk being left behind for years.”
The notion of investment managers who have missed the 40% rally and need to catch up gets a lot of mention but I am not sure how prevalent this is especially as the context seems to be that these same people sold everything low and then missed the rally.
This just doesn't seem likely to be widespread. But it would be reasonable that this happens to people occasionally and certainly for anyone who did sell out and then missed the rally the only thing that could bail them out would be another meltdown. But if they responded to the last meltdown by selling at precisely the wrong time why would they somehow handle the next meltdown differently?
The easy way to avoid this dilemma is to just avoid big bets. Selling everything is an enormous bet and is difficult to get right. If you sold everything on the way down at 750 in February what did you ultimately accomplish if you did not then get back in? You would have been "right" for a few weeks, missed a little bit of pain but the market is now up 25% from where you sold.
This dilemma is a big reason of why my approach is so gradualist. If you are going to participate in the stock market then you need to realize that occasionally the market will go down and thinking you can avoid any drawdown is unrealistic. All of my method around the 200 DMA is focused on going down less when the market looks like it will go down a lot. In that context selling everything is simply the wrong trade.
In the example above locking in a 25% lag could be disastrous. As the stock market averages 9-10% of gains annually over the long term that obviously includes big declines, big gains and everything in between. Just keeping up can at times be difficult but a 25% lag from selling at the wrong time is exactly the thing investment books and articles warn about but of course it does happen occasionally. If you never sell everything then you never have to confront such an extreme consequence.
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Monday, June 08, 2009
Krugman or Ferguson, Who Is Right?
You may be aware of a disagreement between Paul Krugman and Niall Ferguson (not to be confused with Turd Ferguson) about what the rise in treasury yields actually means.Krugman believes it is evidence of confidence about the future and normalcy in terms of market function.
Ferguson believes the market is pricing (what should be) the realization that the US is headed for big trouble as it is printing money, issuing debt and effectively monetizing some of that debt.
Dan Gross chimes in here with links galore if you want to get the whole story.
There are a lot of moving parts to this and for now all anyone can have is an opinion. We won't know the answer for a while yet. Between the two camps (Gross calls them Krugmanites and Fergusonians) is probably where the true answer lies.
As far as confidence and normalcy the pure panic that existed does appear to have subsided. By this I mean confidence that the market can just function (not a directional call for where things are going). Hopefully people remember that there was rampant fear that markets would not function ever again, there were a couple of spasms in this regard of course but we have moved out of the panic stage. I'm not sure how the Fergusionians could argue otherwise as they could be right about the US being in big trouble but the market could easily function the way it should in the face of that outcome.
I suppose there could be a return to that sort of panic but the world is far more educated about things like counterparty risk, the magnitude and danger of the leverage employed and everything else. We can debate whether these things have been fixed or not but if everyone now knows much more than they did before March 2008 then I'm not sure panic in the context we are discussing is possible.
Krugman believes the rise in treasury rates is evidence that investors are willing to go for more return than a few basis points from treasuries, Gross notes how much Brazilian and Indian stock markets have rallied. Again this is a point that is hard to argue because again the US could erode (or implode?) as other markets do well. Money is flowing into other asset classes--not to say it won't all correct aggressively one more time but it is tough to argue that money has not moved from US treasuries to other things.
As for the logic behind the Fergusonian camp I'm not sure how anyone can argue that the US has become a much more attractive investment destination in the last couple of years (to be clear I haven't read anywhere that Krugman has said this). If the US is much less attractive than it was because of all the reasons that you can think of then rates would seem to have to go up a lot, although not necessarily to 1981 levels. I suppose this could be wrong but I don't see how they do anything but go up.
There is an element to this of captive buyers. One way to look at this is that China has to buy US debt in order to protect its current investment. That is at least partially true and I would have to imagine that China getting out of its US investment would require both strategic and logistical planning and some sort of management of the consequence to them when the US can't buy as much stuff from them. No matter your conclusion on this it is a very unhealthy relationship with bad consequences for both parties.
It should be obvious that I am not too concerned with trying to solve this debate as I am concerned for what this means for growing/protecting the portfolio. US treasuries are down a lot but still expensive so anything beyond short term (don't even have any short term though) would be off the table. It seems to me that to think uncomfortably high price inflation (I am not in the hyperinflation camp) won't happen is to believe that the Fed and Treasury will know exactly when to reverse everything which seems unlikely given how reactive they have been all along. Additionally it seems very unlikely that the Obama administration will err on the side of belt tightening.
As I read the Krugman/Ferguson debate they can each be correct on certain things but I am leaning toward the Fergusonian side of the debate because it is closer to what I have expected would happen (not to the same magnitude) and because I see very little need to "protect" against a happy outcome.The pictures are from a NY Times interactive feature about the history of GM. I found the contrast of the two vehicles to be striking. Up top is a 1926 Vauxhall 30-98 OE Type and the second picture is obviously a Hummer.
Sports related: Is Southern Miss this year's Fresno State?
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Sunday, June 07, 2009
Sunday Morning Coffee
Emerging markets stocks, which have delivered 15% per annum returns over the past five years (versus returns of minus 1.9% per annum for the S&P 500).He then goes on to talk about their being expensive at the moment but the numbers, regardless of whether the stocks are expensive now, should be jarring.
A long running theory here (from the start of this site) has been that US based investors will have to progressively increase foreign equity exposure in the next few years. But in reality this idea has already been in motion for several years now. If over the last five years US equities were simply up a little less than emerging market then the point would not be as strong as I think it is now.
The iShares MSCI Emerging Market ETF (EEM) is way off its high but has still doubled in the last five years while the S&P 500 has dropped 17%. EEM has been heavy in South Korea which has only been up 50% in the last five years so it has been a drag on EEM. So anyone avoiding South Korea (by buying single country funds) probably did better than 100% in the last five years. Even iShares MSCI EAFE (EFA), which I think is a terrible proxy for foreign, is flat in the last five years. Obviously the decline in the dollar in that time has contributed to those results but still the difference is significant.
It is reasonable to assume that brighter prospects for select other countries (not just emerging markets) is what accounts for the performance disparities. Looking forward does the US have brighter prospects than other countries (ex Japan, UK, France, Germany and Spain) or is it the other way around?
This weekend is the Super Regional round in the college baseball tournament which means the College Baseball World Series starts next weekend. About college baseball that I always say is that one of the great things about it is that no lead is safe. Well no more on that one, the 30 run lead Florida State had on Ohio State last weekend turned out to be pretty safe. The picture is from 2007 CWS.
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Saturday, June 06, 2009
The Big Picture for the Week of June 7, 2009
No video this week.A reader asked for my take on a version of a Permanent Portfolio posted on a site called Crawling Road (great name) that I presume was first put forth by Harry Browne.
25% - Stocks (in a broad based stock index fund like the S&P 500)
25% - Long Term Treasury Bonds
25% - Gold Bullion
25% - Cash (in a Treasury Money Market Fund)
The post also includes performance numbers. Going back to 1972 the average annual return for the mix 10.0% versus 11.1% for the US stock market. Maybe I missed any info about volatility stats but I would have to imagine it was much less volatile than the stock market.
The first thing I wonder about is the gold allocation. I'm a big fan of gold and own a little but the volatility makes 25% way more than I would ever own. I wondered whether the skew that goes with including the 1970s, the best yet for gold so far, in the period studied gave a long term result that could not be repeated. So in going from 1980 forward I get an annual average of 8.42% compared to 12.36% for stocks. The problem with that is that while I may have removed a period for gold that may not be repeatable I may have isolated a period for equities that may not be repeatable. It makes no sense to go back past 1971 to study gold.
It seems to me that the idea as spelled out is one fund (or product) for each of the four making it a combination permanent and lazy portfolio. Couldn't the concept be applied as an asset allocation model where a diversified equity and bond portfolio are constructed and instead of just gold couldn't some sort of diversified commodity mix be assembled?
First let me say I can't envision getting anywhere close to 25% in commodities let alone just gold. That is something I have mentioned many times in the past. Commodities might have a low correlation to equities most of the time (but not always) but they can be volatile so I'm not on board with that kind of allocation. If you think you want 25% in commodities and are starting from a low or no weight now I would suggest you move slowly or wait for the sentiment to shift what's wrong with commodities which is the exact opposite of the sentiment now.
One reason why the above portfolio concept exists is to capture a zigzag effect. One thing may go down a lot at some point but the hope is that the others will balance out the decline. If proponents of the above concede me that point and if any of them are interested in the asset allocation part of this but are willing to do more than a lazy portfolio then couldn't the equities go up to 40%, gold down to 10% and 25% each still in a cash proxy and long term debt?
I believe the desired zigzag effect can be captured in a properly diversified equity portfolio, I've been writing about just that for almost five years and other folks write about this too so the how to is easily available (take a little bit of process from many places to create your own process).
Within the portion that is allocated to long term treasury bonds can there be no recognition that at times rates are low and at other times high? In that context couldn't you shorten or lengthen the average maturity accordingly? I would also ask about foreign bonds. The allocation, which I pasted from the original post, just says treasury bonds but I think it just means domestic.
I am not going to be using the above in any way shape or form but that does not mean it is not useful to deconstruct to try to learn from. One reason I don't do something like this (there are several reasons) is that I tend to believe that investing, by necessity, is an evolving discipline and complete reliance on past truisms seems like a huge gamble. The camp that believes more foreign investing must be done (I am in this camp) has a point but strict adherence the above ignores that. Yes you could sub an all-world fund in for the equity exposure but then you are immediately admitting some sort of obsolescence with the idea and where there is one there could be more than one.
These types of studies can either cause you to reassess what you are doing or build more confidence in what you are doing, either is productive.
I was saddened to hear of the passing of Randy Smith yesterday. He was an NBA ironman back in his day.
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Friday, June 05, 2009
Debt Ruining Retirement
A blogger named Michael Johnston posed an interesting question in asking whether, after the closing of several prominent hedge funds, ETFs that try to replicate hedge fund strategies will replace hedge funds.The first one to come to mind is the IndexIQ Multi Tracker (QAI). QAI listed in March with a very heavy allocation to fixed income ETFs (QAI replicates several hedge fund strategies using ETFs) so as stocks have gone up a lot QAI has gone up very slightly.
In addition to QAI IndexIQ has filed for 15 other ETFs of ETFs that will more narrowly isolate specific hedge fund strategies.
In general terms the concept has merit. While I would want to give any sort of fund like this quite a few months to prove itself it is reasonable to think that most of these funds can deliver some sort of low vol effect that does not correlate to the US equity market. Some will disappoint though.
What is not a good bet is some sort of exchange traded, retail product going up 500% in year because it shorted the Latvian lat, the Estonian kroon and the Slovenian tolar as we will probably hear about some hedge fund somewhere doing six months from now.
Who knows how these things will be marketed but I would bet that many people will assume they can get huge returns and the only way I can see that happening would be if equities in general had huge returns one year.
There will be a lot of funds in this space but hopefully not unrealistic expectations.
Congrats to Randy Johnson for getting win number 300.
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Thursday, June 04, 2009
Trade Executed
As discussed in the comments earlier in the week and in yesterday's post I was prepared to do a small trade in reaction to the S&P 500 taking back its 200 DMA.
It is difficult to describe the trade as buying X because I had to go account by account to calculate what to do for each account. With that in mind I meaningfully increased clients' tech exposure from a severe underweight using ETFs.
There was a tremendous amount of work, relative to most across the board trades which, combined with a couple of other things, contributed to a logistics issue for getting the trade done Tuesday but it turned out OK in that I bought a little cheaper than I would have on Tuesday. I waited until about 12-10 minutes before the close to execute the trade.
Increasing tech does a few of the things I mentioned yesterday in terms of trying to add a little beta and a sector that might do well early cycle. Toward the end of the day the SPX seemed to be flirting with the 200 DMA and then it appeared to kick up at the end of the day to close several points above.
The trade was about sticking with the game plan set out months ago. My thoughts about another run down that scares the hell out of people have not changed but opinions can be wrong and staying faithful to something that tends to work (as opposed to second guessing) is probably a good idea. It is easier, both for professionals and do-it-yourselfers, to explain being wrong (either to clients or yourself) by saying this was the plan ahead of time and I stuck to it.
It is just one trade, there is still plenty of cash still on the sideline and I have started the process to build the next trade and have it ready to go. From here there is more art than science, especially if the market holds its 200 DMA. I'll update the blog accordingly as we go.
One other dynamic that made the trade a little easier (in terms of strict adherence) is that the 200 DMA is dropping quickly making it easier to stay above it, in a manner of speaking. I've brought that up before a couple of times. The flip side of that coin is that many believe that it will still be a bear market until the 200 DMA starts to turn up.
Tweaking the idea to account for slope is something to consider for the next go around but I don't want to change mid stream. While I have been generally pleased with how this has gone it has not been perfect (said up front it wouldn't be). The SPX went further below its 200 DMA that it ever had before so it rallied a lot before taking it back but again it warned early and would have you get back in at a much lower figure.
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Wednesday, June 03, 2009
Wednesday Randoms
IndexUniverse reported that in addition to Pimco launching its first ETF it also filed for six more. The one that is trading is called the Pimco 1-3 Year U.S. Treasury Index Fund (TUZ). The six others include several me too bond funds but unique in the filing is a long term TIPS fund and short term TIPS fund. Those could be interesting.
Hopefully Pimco is just getting started with this and can bring some other differentiation besides the two TIPS funds. Obviously (to some readers) I'd like to see them do more with foreign bonds.
There were a lot of comments yesterday that I could not get to, so....
Early in the day I Tweeted (you know, on the Twitter, like the young people) about a comment from Blackswan Trading. The comment was about students in China laughing at Timothy Geithner when he talked about a strong dollar. To answer BillB these guys have nothing to do with Taleb. I have no idea who started using the term first but I get some good info from the one that is not Taleb in a daily email.
A reader asked what if anything I have done with bonds of late given my idea that the market is generally broken. The only thing to come due lately was the Norway paper which I rolled forward to 2011. This calendar year I have bought two short term corporate issues; one from a health care company and the other from a tech company both of which are highly rated.
A couple of comments came in about the 200 DMA which for now has been crossed. One reader seemed ticked I hadn't mentioned it yet. To him, I say chillax broseph. I mentioned in the comments the other day that I will be doing a little bit of buying this week and if we keep the 200 DMA today then I have a trade ready to go (probably in the last hour). I will detail the trade in Thursday's post assuming there is a trade.
As far as the other comment which was about what to do to re-equitize well that is a tough one. While I will have more tomorrow (again assuming I do the trade) it would seem to me one way to go is to buy into something that tends to be early cycle or buy something with a lot of beta to get some bang for the buck or buy something you are particularly underweight in or maybe just buy the market (broad based index fund) just to get the exposure.
For now I have the next trade figured (meaning for each account). I have the trade after that (if circumstance dictates) nailed down to two choices from the same sector and have a couple of vague ideas (well not that vague) for after that.
Another reader asked what I was going to do with my double short position. When I bought I had indicated I'd buy more after a 5% move in either direction. Well we've had that (actually a couple of points away) but at the same time the market has done up the 200 DMA has tanked. SPX 945 would have been below the 200 DMA from when I bought SDS but now not. I'm not in a hurry to sell what I have but adding more above the 200 DMA is unlikely for me.
That may draw a heckle or two but my goal is avoiding most of down a lot not successful scalping.
Something new for me; comments I made in an interview are being dissected at a site called Gold News.
Felix Salmon did a write up about Nassim Taleb that I missed in writing up my post yesterday. Apparently Felix has spoken to him quite a few times and so has a better handle than most. He said one thing in particular that stuck out which was;
This is what I have been saying about him since I first stumbled across him a while back. That I understand his biggest possible macro is nice but I still need to read his stuff very slowly.
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Hopefully Pimco is just getting started with this and can bring some other differentiation besides the two TIPS funds. Obviously (to some readers) I'd like to see them do more with foreign bonds.
There were a lot of comments yesterday that I could not get to, so....
Early in the day I Tweeted (you know, on the Twitter, like the young people) about a comment from Blackswan Trading. The comment was about students in China laughing at Timothy Geithner when he talked about a strong dollar. To answer BillB these guys have nothing to do with Taleb. I have no idea who started using the term first but I get some good info from the one that is not Taleb in a daily email.
A reader asked what if anything I have done with bonds of late given my idea that the market is generally broken. The only thing to come due lately was the Norway paper which I rolled forward to 2011. This calendar year I have bought two short term corporate issues; one from a health care company and the other from a tech company both of which are highly rated.
A couple of comments came in about the 200 DMA which for now has been crossed. One reader seemed ticked I hadn't mentioned it yet. To him, I say chillax broseph. I mentioned in the comments the other day that I will be doing a little bit of buying this week and if we keep the 200 DMA today then I have a trade ready to go (probably in the last hour). I will detail the trade in Thursday's post assuming there is a trade.
As far as the other comment which was about what to do to re-equitize well that is a tough one. While I will have more tomorrow (again assuming I do the trade) it would seem to me one way to go is to buy into something that tends to be early cycle or buy something with a lot of beta to get some bang for the buck or buy something you are particularly underweight in or maybe just buy the market (broad based index fund) just to get the exposure.
For now I have the next trade figured (meaning for each account). I have the trade after that (if circumstance dictates) nailed down to two choices from the same sector and have a couple of vague ideas (well not that vague) for after that.
Another reader asked what I was going to do with my double short position. When I bought I had indicated I'd buy more after a 5% move in either direction. Well we've had that (actually a couple of points away) but at the same time the market has done up the 200 DMA has tanked. SPX 945 would have been below the 200 DMA from when I bought SDS but now not. I'm not in a hurry to sell what I have but adding more above the 200 DMA is unlikely for me.
That may draw a heckle or two but my goal is avoiding most of down a lot not successful scalping.
Something new for me; comments I made in an interview are being dissected at a site called Gold News.
Felix Salmon did a write up about Nassim Taleb that I missed in writing up my post yesterday. Apparently Felix has spoken to him quite a few times and so has a better handle than most. He said one thing in particular that stuck out which was;
Taleb is, as ever, annoyed that people are looking at things like GQ errors rather than at his bigger philosophical points
This is what I have been saying about him since I first stumbled across him a while back. That I understand his biggest possible macro is nice but I still need to read his stuff very slowly.
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