Stay On Your Own Mat

Stay on your own mat is a yoga term which means that you should not worry if the person next to you can do the pose better than you can. This is consistent with being in the moment and doing what you are able to do.

I thought about this as I read the comments left on a post from Randall Forsyth about the failings of the cash for clunkers program. Forsyth points out some of the unintended consequences of the actual program and then the lack of lasting economic benefit. We learned under Bush that short term stimuli do not have lasting impact. I'm not sure why this is so difficult to grasp.

The reason for the title of the post comes from one reader who said he was "more than a bit resentful" that he having taken responsible actions like buying a Honda and saving money is not a beneficiary of any of the government programs that have been enacted since the crisis started.

The commenter is correct about the inequity of the various attempts to fix things. It does appear that bad behavior is being "rewarded" by having access to mortgage adjustments (if this is really going on in a meaningful way) and whatever else is being attempted.

This is where the idea of staying on your own mat comes into play. Chances are that if you have accumulated some savings you feel some sense of accomplishment and security which is not bad. If you have a mortgage you can easily afford and never had to worry about not being able to pay then you avoided a mountain of stress. Again, not too shabby.

If you have savings and a mortgage you can easily afford (or have paid off your mortgage) then part of you wants to avoid the types of stress that goes along with being over leveraged or living paycheck to paycheck. Clearly this type of security is worth something and to paraphrase Woody Allen there is never a time where more savings made the situation worse.

Prudent financial behavior helps reduce or avoid all sorts of stress and worry regardless of whether the guy down the street got a principal reduction and a new Toyota Yaris. Bad behavior/poor decision making has always and will always impede economics. You can either let it bother you or you can stay on your own mat.
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If Japan Is Going To Blow Up

The theme that (I believe) started in Barron's over the weekend about Japan eventually blowing up has picked up a little attention as several people have written about it. You can look at Sunday's post for a couple of highlights as to why and the link to Barron's.

If this happens it will cause a lot of havoc for investors who rely on the iShares MSCI EAFE Index Fund (EFA). EFA allocates 23% to Japan. If Japan truly blows up as some are calling for then it stands to reason that any equity fund heavy in Japan, like EFA, will get hit very hard.

I've never liked Japan as an investment destination and obviously avoiding it has been right far more often than it has been wrong. I've written a lot of posts about the merits of country selection and while not everyone will want to do this country avoidance could become very important.

I am not aware of any broad based fund that avoids Japan but the country can be avoided by anyone not willing to pick countries. As a substitute for EFA a combo of WisdomTree Asia Ex-Japan High Yield Equity Fund (DNH) and Vanguard European Stock ETF (VGK) gives broad coverage and bypasses Japan. Some clients own DNH, no one owns VGK.

Clients do not have heavy exposure to big Western Europe as I think they have some big problems too just not as bad as Japan. But the context here is people who do not want to pick countries but might really want to avoid Japan.

On a lighter note Red Sox legend Johnny Pesky turned 90 over the weekend and threw out the first pitch last night. The way he was bouncing around I am pretty sure he could have gotten a hit off of Red Sox starter Michael Bowden (a September call up) who got racked by the Blue Jays.

Update at 5:55 am; I forgot, today is the fifth anniversary of the start of this site. I downloaded Firefox and blogger was a preloaded bookmark. It started out not being about the stock market but I ran out of things to say after a couple of days. Five years, yikes.
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Fund Folly

I stumbled across an old article in the the Wall Street Journal profiling an advisor including her model portfolio pictured below.

The advisor's target allocation is 40% domestic equities, 35% bonds (10% of the 35% is foreign), 15% foreign stocks and 10% Alternatives which includes managed futures. Anyone may or may not agree with the allocation but like any allocation this will be fine most of the time but it may make sense to raise cash at different points in the future.

The way the advisor implements the model is problematic. As you can see all of the holdings are actively managed mutual funds. The funds chosen are probably "good" funds. Advisors don't usually pick the worst performers in the group. "The small cap fund I chose for you has lagged its benchmark index and 80% of all small caps for the last ten years," doesn't happen too often.

Boilerplate always warns about past performance but what else can you do? Any buyers of actively managed funds out there go with the active fund that is 15 basis points cheaper or do the take the better track record?

Additionally there is no way to do any sort of forward looking analysis. What will the manager of your active mutual fund want to own one year from now? As the question is unanswerable forward looking analysis is undoable. The potential consequence is that the portfolio owns a bunch of funds where the managers all draw similar conclusions and so invest their funds similarly. This is fine if they are right or a potential deathblow if they are catastrophically incorrect like being overweight tech in 2000 or overweight financials in 2008.

This problem doesn't really have the same consequence with narrow based funds. If a portfolio allocates 15% to an actively managed financial fund and fills out the rest of the portfolio with sector funds then the portfolio isn't going to get caught with 30% in financials. The problem of too much of one sector or not enough of another can occur using actively managed country funds.

Using an actively managed fund as part of a diversified portfolio can certainly make sense but total reliance seems like a problem waiting to happen.
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Sunday Morning Coffee

A few odds and ends this morning.

First up Barron's has a lengthy post about how Japan could end up defaulting on its debt at some point in the future. The big idea is that the population will be getting smaller and older and their version of social security faces some problems. Chances are you know that Japan's debt load is about twice it's GDP and while that is mitigated somewhat but the cash hoard the savings rate has been on the decline.

I've never been a fan of Japan as an investment destination. Most of the issues here were not new but the conclusion of a debt default was. This is a fair ways away from playing out one way or the other but certain funds like the SPDR International Treasury ETF (BWX) are heavy in Japanese debt and are likely to always be heavy because of their methodology. At some point they could become a sell. A few clients own BWX.

Now for something very amusing. A few weeks ago I wrote a tongue in cheek blog post about the best five places to retire based on living a state with no income tax that was next to a state with no sales tax. The idea being you live where there is no income tax and buy your stuff where there is no sales tax.

Well Barron's had a similar article yesterday. It was just about moving to a state with no income tax, it did not go as far as to explore the tax arbitrage as reader Stephen Drone put it. I get a kick out the whole idea but on a serious note this line of thinking is innovative and being innovative in general will be crucial. One last point on this for now; the Barron's article referenced a couple moving to Sheridan, Wyoming to longer pay state income tax. Probably a good idea to go spend a few weeks there in the dead of winter to know what you might be in for.

The two state ETF were supposed to start trading a week ago and it appears they have not yet listed. Thinking that maybe I missed them, there is supposed to be one for Texas and one for Oklahoma, I went to Yahoo Finance and starting typing in O K L A... and I found a stock I'd never heard of called Public Service of Oklahoma (POH). It is publicly traded but also a subsidiary of some sort of American Electric Power; the exact verbiage says it "is part of the American Electric Power system."

It is NYSE listed but there is almost no volume. The market cap is $226 million, it has $868 million in debt a P/S of 0.15, a yield of almost 6% and trades at three times earnings. A PE of three? Woo-hoo! It is pretty clear that there was some sort of one time event to effect the earnings but I could not find any news telling what that event might have been but to be candid I didn't exactly make a day of it either. Anyone interested in finding out could probably call investor relations and get right through.

Looking for information about one stock is a great way to find another interesting one by accident. I've found a few that way over the years including a couple I hold now.

Finally a quick little story about life here in Walker. I've mentioned my (now) 78 year old neighbor with the backhoe. He is also a firefighter, really a remarkable role model for successful aging on several fronts. I went over to his house yesterday to borrow his chimney sweep (on the honey-do list for yesterday) and we were chatting for a few minutes and he made a comment about his getting older so I said "well, what are you 60 now?" And he shot right back "I could do anything when I was 60." I thought that was a brilliant one-liner.
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The Big Picture for the Week of September 27, 2009

David Rosenberg put out a report that focuses on why he believes commodities are in a secular bull market with many more years to run. I would suggest you read the report. You can click here, you will have to register if you have not done so already. I wanted to focus one narrow point that I think is a tie in with a point I have been making here for a long time.

Rosenberg believes that the commodity bull favors Canadian equities over US equities. The line of thinking is easy to follow. Canada is a commodity based economy and the stock market there has a heavier weighting to energy and materials companies.

The table compares the sector weightings in the TSX versus the S&P 500. According to the table energy accounts for 27% of the TSX. This is in the same ballpark as the iShares Canada Fund (EWC) which allocates 25%.

One issue that often comes up in portfolio construction is unintended sector weightings. With the transparency of ETFs (the context here is people that do not want to pick a lot of individual stocks) this issue simply becomes a spreadsheet problem.

Anyone investing at the sector level needs to make decisions about how much to have in each sector. If an investor, for whatever reason, decides they want to target 15% in energy and they build a portfolio combining sector, country and thematic funds then they have to look under the hood and simply calculate how much energy exposure their various funds give them.

In looking at a simplified example with the 15% in energy. A 10% portfolio weight to EWC creates a 2.5% portfolio weight to energy. A 10% weight to WisdomTree International Energy ETF (DKA) obviously adds 10% of energy to the portfolio but with no Canada--so no unintended overlap. And the last 2.5% for the sector could go into a specialized fund like Market Vectors Coal (KOL). KOL is heaviest in the US at 46%, China 22%, Indonesia 16% and they get much smaller from there so again not much overlap with EWC or DKA.

To repeat this was just an example. Obviously the above would require having positive opinions about Canada and Coal and the desire to have most of the energy exposure in foreign. DKA is a client holding.

EWC has heavy weightings to financials at 36% and materials 17%. So obviously they would need to be taken into account with the building of those sectors with other funds. Materials are about a 3.5% weight in the S&P 500 so the 10% allocation to EWC gets the portfolio about halfway to an equal weight exposure.

Additionally Morningstar Portfolio X-Ray can help with this.
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CNBC Today

I am scheduled to appear on CNBC about 2o minutes before the close today. Please check it out if you have a chance.
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Julian Robertson Likes Norway!

Julian Robertson was a featured interview on CNBC and as usual he was very worth listening to. I think the most important takeaway was his repeated insistence that if the Chinese and Japanese reduce their purchases of US debt, let alone outright sales, the US would be in a world of hurt. Obviously this is an unknown variable but is clearly the risk. Despite Erin's responses to this line of thought there is nothing new about this. Even I've been talking about that for a while.

The extent to which our financial functioning has relied on foreign purchases of our debt should not be new to you. Additionally the amount of borrowing it takes now to create a dollar of GDP growth versus how much debt it used to take is also something you should be familiar with. These are crucial dynamics.

These looming issues have not prevented the S&P 500 from going up 60% from its March low but are the essence of why I have been writing about increased foreign exposure from the start of this site. It seems logical that these, and the other issues, will matter at some point and have to be reckoned with. Obviously this line of thinking has existed for a while so it could be a long time before it matters.

As opposed to guessing when this will occur I'd rather just slowly increase foreign exposure slowly over several years.

On a somewhat humorous (to me) note Robertson said the Norwegian kroner was his favorite currency. Erin said he had a very big bet on Norway, who knows what big is but Robertson cited all the things that every Norway bull has been talking about for years.

My exposure to Norway has been the same for several years now; Statoil (STO) and short term sovereign debt. Obviously anyone can buy a stock but the debt is a little trickier as minimum order size for foreign debt is $100,000 (I am able to buy all at once and allocate smaller positions into client accounts).

GlobalX has filed for a Norway ETF but who knows when that will come out. In the mean time there are some stocks besides STO to check out for anyone so inclined. In the materials sector there is Yara International (YARIY), in telecom there is Telenor (TELNY), a name I used to own for a few clients, in financials there is DNB Nor (DNBHY) and there is even an ADR for one of the fishery stocks Marine Harvest (MNHVY)--careful there though as neither Yahoo Finance or Pinksheet.com shows volume and Schwab did not have the ADR set up in its system for trading but ADRBNY has quote information so go figure. In tech there is Opera Software (OPESY) and there are others. To be clear I am just mentioning that these stocks exist not suggesting they be bought.

Each country can be looked at for stocks in this manner as a starting point for research. I have stuck with STO because it is by far the biggest company in that market, heavily involved it what the country is known for making it a good proxy. At some point though I will want to increase my exposure from the one name to include a second stock.
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ETFConnect Is No More

Here is bit of ahead scratcher; ETFConnect.com, you know the website with all that information about every ETF, the site that has been a well known, well used and well publicized resource for professionals and do-it-yourselfers?

Yeah they are out of the ETF business. Instead they will focus on closed end funds exclusively.

I can just imagine how it went. Some big wig hurriedly calling people in for a brainstorming session. "We need to greatly reduce our web traffic and do it soon! Give me ideas people."

Then after toiling away for hours someone hits the motherlode. "Let's scrap any and all involvement with the investment product that has the growth in new products, assets and investor interest and instead focus on the antiquated product that is becoming more and more obsolete as time goes on!"

"Tell me more" the boss might have said.

"Look, its like movies. No one watches movies on VCR cassettes any more they watch on DVD or blu-ray or on-demand, some people even stream movies. If we want less traffic on our website we have to only provide information on the VCR cassette of investment products; the closed end fund!"

"Excellent Smithers, excellent."

My characterization of CEFs as being antiquated might be unfair but in terms of growth there is no comparison. ETFs have left CEFs in the dust and that will continue for years to come. According to a link I found from ICI the total assets in equity closed end funds as of June 30 was $77 billion. Yesterday the SPDR S&P 500 ETF (SPY) closed with assets of $71 billion. The total assets in all closed end funds came in at $201 billion.

I find this to be baffling beyond belief. They had built one of the premier sites for ETF information. I cannot recall a website chucking what had worked in this manner. Yes the site is owned by closed end fund titan Nuveen but they called the site ETFConnect and built something very substantial.
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Mark Mobius Interview

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Yeah, It's Unlikely But Still

Yesterday I read this article about Social Security benefits. I'm not certain that the article is correct on all the ground it covers but it was interesting. Naturally after reading the article I put our numbers into the Yahoo Finance Social Security calculator and got the following pictured below.

I have been pretty consistent in believing that one way or another entitlements will not be there when my time comes. It's just an opinion and of course I could be incorrect but it makes more sense to plan on no social security and then have it be there instead of the other way around.

If we take my benefit when I am 70 and my wife's benefit when she is 68 (she is six years younger) then our combined benefit would be $4704 per month in today's dollars. Well that is way more than what we spend on the basics (utilities, various insurances, groceries and gas). We have no car payment now but that could change in 2015 when our 4-Runner turns 15. Even with the Hilo house factored in $4704 is a little more than what we have to spend to cover everything that is non-discretionary. Obviously on top of this would be things that cannot be planned for like car repairs, vet bills and the like. After that would be spending on things we want to do.

Needless to say this is quite encouraging if social security actually exists when I turn 70. A big problem is people who live beyond their means but there are plenty of people who do live within or below their means and there is time for other people to learn how to live within or below their means.

All of this coincides with a conversation I had with a friend who got a good scare at some sort of retirement planning seminar put on at work. I didn't get a lot of detail but apparently the numbers were daunting but of course whoever the speaker was probably had something to sell and had a vested interest in creating an air of daunt, so to speak.

What I know of my friend's situation is that they are in pretty good shape and they already have a hobby that they have successfully figured out to monetize so the idea of generating some sort of income after "retiring" does not come as a shock.

A concern about working, reasonably speaking, is being forced to take a job you don't want to take because you simply need the money. How old are you? When do you plan to retire? What are your interests? What sorts of things are available where you live or want to live? That is what you have to work with if you feel your portfolio and social security won't get it done.

With a little bit of innovative thinking and some decent planning the idea of finding some sort of enjoyable work a few hours a week that takes some of the burden off your portfolio and maybe contributes to your health insurance needs should not be daunting. If you are self-employed in this context you probably are working more than a few hours a week, hopefully because you want to, making a little more money but on your own for (gap) health insurance. A couple today needing $5000 per month collecting $3000 from social security and making $1000 with some sort of part time work does not need to have millions accumulated to make it work.

This part of the solution is only limited by our own ability to think. The possibilities are limitless.
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Tuesday Tidbits

GlobalX is making more hay. Last week it emerged that it filed for six Chinese sector funds. IndexUniverse reported that GlobalX has also filed for country funds from Denmark, Norway, Finland, Pakistan, Poland, UAE and Emerging Africa (whatever that means). GlobalX also has filings on the books for Egypt and the Philippines.

Obviously those funds would break a lot of new ground in terms of access but they are just filings for now. I always circle back to to WisdomTree's filing for a fund for just about every currency on the planet only to list a small number of them. Obviously there are expenses and risk with listing a new ETF but the filing for dozens to only list a few exists and so we'll just have to wait to see what they list.

I hope all of these do list sometime soon. One potentially valid way to navigate the next ten years or longer will, IMO, be to select a basket of country funds comprised of destinations with different fundamental attributes. This would require watching sector weights under the hood of such a basket (the reason I prefer to go narrower) but still valid nonetheless.

The new AdvisorShares Dent Tactical ETF (DENT) has started to trade and drawing a fair bit of negative press. There is criticism over the expense and the vague nature of what the fund will do. Heather Bell expressed concern about the expense setting a bad precedent because most ETFs are cheap.

I'm not sure what the beef here is. DENT is an actively managed fund that happens to use the ETF wrapper. That it is expensive may or may not matter, just noting the expense in nominal terms is incomplete. If the fund were to net its holders 1000 basis points per year ahead of the S&P 500 then I suspect investors would gladly pay twice the 1.5% the fund is charging.

Larry Swedroe spells out why great returns from the fund could be very unlikely and after reading Swedroe's thoughts about the fund I would avoid it if it were free. I agree with Ron Rowland (quoted by Heather) that the fund will soon make his ETF Deathwatch list but expense, all by itself, should not be the primary determinant for a specialized fund.

Continuing with the retirement theme from a couple of days ago Yahoo Finance re-ran an article from Marketwatch about the 50 best employers for people over 50 years old according to AARP. I found it interesting that nine of the 50 were colleges or universities (not including Corinthian Colleges). There were also a couple government agencies on the list (state and federal).

In many of those best places to retire articles they talk about taking classes and such and such college nearby. Maybe the focus should be working at such and such college nearby?

The picture? No reason other than it is neat.
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Lee, Florida!

Over the weekend Barron's had an article about the real estate market in Florida. It covered a lot of ground with not a lot of depth but was interesting nonetheless.

One part that interested me was that "in Lee," that's Florida and the quotes will make sense in a moment, back in 2006 there were 12 homes for sale under $100,000 and today there are 4200 homes below $100,000.

Lee, FL is up near the Georgia border about halfway between Tallahassee and Jacksonville with biggest town nearby being Valdosta, GA. So it appears to be a small town with a couple of pretty big cities a couple of hours away. As someone who lives about a couple hours away from a big city that is a manageable situation in terms of access to certain services.

According to the town's website the population is 402. If the population is 402 then I doubt there are 4200 homes at for sale at any price. I think Barron's may have left out the word county which if that is the case then we are talking about Lee County Florida which is where Fort Myers is so the area is more populace with more services right there.

According to Realtor.com there are 214 single homes for sale in Fort Myers between $90,000 and $125,000. The 4200 number pertains to the entire county. That kind of supply below $100,000 makes for a very affordable retirement solution. A couple in their 50s from a bigger city elsewhere could easily have a home paid off that they could sell for $300,000-$400,000 to then buy a modest home (presumably a $300,000-$400,000 house in the Northeast would be modest and this would not represent an unreasonable downsizing) outright as mentioned above and have $200,000-$300,000 left over to add to their savings.

With what I have in mind an additional $200,000 would be a meaningful addition for this type of financial situation.

If somehow Barron's did mean the town of Lee, Realtor.com has ten listings with the range being $93,000-$259,000 before the price goes way up for enormous acreage.

Chances are there are plenty of locations around the country that are two hours drive from a big city that are very affordable places to live. This even applies to a place like Boston. Realtor.com has 62 listing in Pittsfield, MA (137 miles from Boston and 157 miles from New York City) below $150,000, 16 of them below $100,000.

If retirement for the boomer demographic stands to be as difficult as it appears then the very unoriginal idea of downsizing will be very important and can be done very thoughtfully. People with no ties to family can make this work in just about any type of climate they favor. In addition to Florida and the Northeast there are plenty of areas in the Mountain time zone where home prices are now quite low and relatively close to a big city, obviously the Midwest and even the Pacific Northwest.

For people with family obligations where a three hour plane rides are not a workable solution there are places like Pittsfield that are a reasonable drive from where someone might be relocating from.

The average 401k balance is in the $40,000-$50,000 range (anyone knowing the exact number, please). Replacing a $70,000 income (again a modest number) in retirement requires at least an $850,000 portfolio, assuming a combined social security benefit of $36,000 and if social security does go away or benefits are meaningfully reduced then what?

A lot of my content along these lines is based on trying to figure out innovative solutions to these sorts of issues. While I don't think of myself as having control issues the idea of success or failure of my financial plan relying on things totally beyond my control like whether social security and medicare will be there when my time comes is simply unacceptable without trying.

While posts about Ranchester, Wyoming or my 78 year old neighbor who does backhoe work may seem a little wacky I am convinced that successful retirement in the next couple of decades will require much more innovation than in the last few decades.
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Sunday Morning Coffee

Barron's had a lot of meat on the bone this weekend starting off with the cover story about the extent to which investors may have lost interest in normal amounts of investment risk or what used to be normal anyway.

The article includes commentary from various firms around the street exploring this with model portfolios that look much different now than they did a few years ago. Also included in the discussion was comments from Mohamed El-Erian and his model portfolio.

I would add to the discussion that de-emphasizing equities after a bad decade in line with the thinking of a lot of brokerage firms is probably a bad idea. The current event may last a couple of years longer of course but after a decade long 30% decline there is a very good chance that we are most of the way through this. The time to implement a 30% allocation to equities is not after the worst crisis since the great depression.

This is not to say that you should not increase your foreign allocation. Some fear the US economy and by extension the US stock market are headed the way of Japan. Right or wrong I have never felt it will end up being that extreme. My thought all along has been below normal equity returns in the US creating the need for more foreign exposure.

As mentioned yesterday it is becoming easier to access the world broadly and narrowly with ETF and ADRs.

On a related note the Barron's interview was with Vitaliy Katsenelson (I get spam from this guy in my street.com email account every weekday). There was a lot of discussion about secular bull and bear cycles. It reminded me of something I mentioned once or twice before about a very long term type of exit strategy (perhaps not the best description but bear with me here).

Just as 1982-1999 was a secular bull market this decade is quite probably a secular bear market. The current secular bear will end at some point and then another true bull cycle will begin. Maybe that first one will be a secular bull or maybe not but there will be another 10-15 (ish) year period where global equities go up a lot, an awful lot.

From August 1982 until March 2000 the S&P 500 went from 103 to 1510 with several crises along the way. That a broad index went up so much means that diversified portfolios had a chance to go up something similar. Given what we know about human foibles let's assume that instead of a portfolio going up 15 fold with the market a portfolio only went up eight fold (about half as much as the market) that is still a colossal return in absolute terms.

Expecting a repeat in the US is probably a bad bet. I do think however that we could see something almost that big (maybe eight fold in some 15 year period) in broad based global indexes. In that scenario a US based investor at that time with the same foibles as his 1980s-1990s cousin who takes the idea of a global portfolio to heart might be up four fold.

A decade or two where broad global indexes go up 8-10 fold, or there abouts, is a good as it will ever get. If we are lucky enough to be around the next time something like that happens, regardless of how well we did relative to the index, we would need to cut back exposure dramatically at that point. You could wait for 200 DMA breach or the 50 DMA crossing below the the 200 DMA or something else but cutting back after the biggest bull market in 30 years or 40 years or whatever, even if it keeps going, will ensure much less pain when that party finally ends.

Right now we are at the opposite end of that spectrum globally speaking. To be clear I am not talking about one stock going up five fold in a couple of years or so but getting that type of gain from broad based indexing.

Think of it this way; how much do you have in your account right now? If ten years from now that figure was five times bigger than it is right now, by how far would that exceed your expectations? If you got 25 years worth of returns in ten years do you think it might be prudent to lighten up at that point?

On an unrelated note Joellyn and I did something unusual on Friday night. The rock band Foreigner came to Prescott (Prescott Valley actually) for a concert. Apparently they do this thing where they make contact with a local charity to sell their CDs before, during and right after the concert and the animal rescue that Joellyn works for was that charity for the Prescott Valley show. People paid $20 for a double-disc set, $5 of which went to United Animal Friends, and they got a ticket for a drawing to win a Les Paul guitar autographed by the band and to meet the band after the show. I was roped in to being the spokesperson (no public speaking hangups) which entailed going on stage a total of three times to talk about about United Animal Friends, the drawing and then to announce the winner.

Collectively we sold about twice the number of CDs that they typically sell to a much smaller audience than normal netting UAF $1760.

As for the band and the concert. I had forgotten how many big songs they had (check out the Wikipedia page) wow. Only Mick Jones is left from the original band, the rest are new originals (Spinal Tap reference) and they put on a hell of show. About 1/3 of the drum solo the guy did with his bare hands, I'd never seen that before. All in all it went very well and we had a great time. If you care you can see more pictures posted on the UAF Facebook page. If you are on Facebook please become a fan of UAF.
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The Big Picture for the Week of September 20, 2009

This was an interesting week in the ETF world. In no particular order PowerShares filed for a build America bond ETF. Build America bonds are targeted toward US infrastructure projects, are taxable municipal bonds and the yields are quite a bit higher than treasuries. Some places have quoted yields at 100 or more basis points above similar treasuries in the past but apparently that spread has since narrowed some. Barron's has written about these bonds a couple of times.

Since it is just a filing who knows when or if the fund will list but I do find it interesting. If nothing else the underlying index from Merrill Lynch could be a way to learn more about the segment.

The fixed income ETF market is improving slowly. A couple other interesting fixed income ETFs, but I don't own them, are the Market Vectors Pre-Refunded Muni Index ETF (PRB) and the SPDR Convertible Bond ETF (CWB). There is room for vast improvement in the foreign debt ETFs. Most of the funds there are very heavy in Japan because of how much debt Japan has issued (almost twice the GDP).

GlobalX filed for six Chinese sector ETFs. Of the six I would be most interested in materials and industrials. I'm surprised there is no utility fund filed for, it could tie in telecom so it could have enough holdings. The energy fund could be interesting too but the big oil stocks are very easy to buy. I'll be curious to see if tech is where all the solar stocks end up. I'm not really interested in owning solar stocks but still. The industrial fund could own companies that clean the water and air along with the various toll road stocks but the toll road stocks could also go into a utility sector fund if there was going to be one.

EG Shares launched its latest fund this week, the Emerging Market Financial Sector Fund (EFN). I'll be writing about the fund during the week for theStreet.com. Like all funds this one has some quirks to it but one thing is true, anyone wanting to avoid domestic financials will have to consider less than perfect funds to capture the sector.

While the number of new funds and listings has clearly slowed down I think more of the new ones have potential utility than before when the volume of new product was greater. The recent Peru, Vietnam and Nordic funds as examples of funds with utility, the state fund for Texas that I thought was supposed to list this past week, not so much. The Oklahoma fund though could be some sort of ex-large cap energy proxy.
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En Fuego

The stock market has clearly been en fuego for an awfully long time. As has been the the case the whole way up from March people can spin all information available anyway they want to conclude what they want but the market has gone up regardless of anyone's conclusion.

The other day Laszlo Byrini made a comment that I have made many times before (not sure who originated it) which is that the bear case is always more compelling and more articulate. I can't make a convincing bull argument. Ages ago (the end of 2008) I made the case for a big snapback rally based on the simple fact that no matter how bad things are (were), after hideous declines the market retraces a noticeable portion fairly quickly.

At some point the current snapback rally went from ordinary (in magnitude) to out of the ordinary. One reader noted that the only thing the market has going for it is sentiment. I don't know if that is the only thing but I remain quite skeptical. In weighing out the positives (there are positives) and the negatives I think the the balance favors the negative by a wide margin. The worst economic event in 80 years resolves itself like a (almost) normal recession? That just doesn't make sense to me.

That being said a point I made countless times about why 100% cash is a bad idea is that you end up missing huge rallies. Lagging a huge rally is different than missing a huge rally. At one point the cash level was in the ballpark of 30% plus the double short ETF and a market neutral fund or two. Through the course of the year I have added slowly to clients' equity exposure with a discretionary ETF, a purchase of Caterpillar, an increase in the tech ETF we use and recently adding Suncor (SU).

YTD I am a little behind the market but still have a fair bit of dry powder so it is possible my risk adjusted stats look decent. Clients did not drop anywhere near what the market dropped and despite lagging this rally clients are now down high single digits from the quarterly high water mark from 2007.

I mention this to create a proper (IMO) long term context. I talk often about viewing this over the course of the entire stock market cycle (a bit of process perhaps gleaned from John Hussman). People all too often focus on absurdly short periods of time. Quick, did you beat or lag the market in Q2 2004 and by how much? You don't know from memory because it doesn't matter. We've had a horrible, but not unprecedented, decade for equity returns. What matters is whether you avoided some of that decline. Actually what probably matter more than that is how much you saved over the last decade.

Anyone of at least mediocre investing ability will have periods where they are ahead of the market and periods where they are behind. That just goes with the territory. If you know ahead of time there will be periods where you "beat" the market then there is no reason to get cocky about it. Likewise if you know there will be periods that you will lag the market there is no reason to get despondent about it.

The way I view things there are times to smooth out the ride (not pull off the road) and times to take every bump as it comes. You cannot be right all the time but you can reduce the consequence of being wrong.
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But Cash Is Earning Zero

The idea of cash earning zero comes up every soften in interviews in the context of managers needing to put cash to work because of the low yield or you don't get paid to sit in cash or managers needing to get invested ahead of the quarter (window dressing).

This is entirely the wrong context. If you knew that stocks would double over the next year then a moneymarket yield of zero is bad. If you knew that stocks would cut in half over the next year then a moneymarket yield of zero is fantastic.

Obviously no one knows whether stocks will go up 100% (unlikely) down 50% (unlikely) or something in between (likely). People who actively manage portfolios (for themselves or others) probably have an opinion about direction and tilt to that opinion in some magnitude. In this context cash becomes a tactical tool regardless of the yield. As a tool it is used in correct proportion for a given period or it isn't but the idea of too much cash does is not complete without context.

During the worst of the recent (current?) bear market I met with my firm's primary point of contact at Schwab and he mentioned something about our cash level being high, this as the market was puking down. To put it in Hussmanesque terms if risks favor the downside then having cash regardless of the yield becomes the correct tactical decision.

Unfortunately much of what we see in the media asks the wrong questions or more correctly frames the context incorrectly. "I see you don't like financials" as one example. Actively (so not passive) navigating market cycles can be made much easier (not easy, easier) by weighing risks and rewards of various things you invest in either broad asset classes, investing at the sector level, country level or however narrow you go.

In too many interviews in the media, maybe as a function of time, the questions asked do not necessarily seek the correct context and the person being interviewed may or may not realize this and add in that context. Anytime you read or hear anyone speak it is important to realize there could be more context as not every one tells you everything he is thinking like Jimmy Rogers.

Fred Cusick long time announcer for the Boston Bruins died yesterday at age 90. I mentioned him in a blog post recently for still doing some announcing work into his late 80s. The picture is of him calling games in the Cape Cod Baseball League from a couple of years ago.
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Twofer Tuesday

A couple of quick items this morning.

First up is news that Serbia has to cut 20% of its federal employees in order to receive a round of funding from the IMF. This ties in with a crackpot idea I had about the US federal government quite ways back that I don't think I have mentioned before. Let me just say that its not like I've written a white paper detailing budgets and personnel issues in order to sort out how this would work. So with that in mind.

In the most simplistic form close every federal department except the defense department (and FBI etc). Farm everything out to the state and pay for the state to administer the programs with federal dollars but with out the federal buildings or federal personnel. As for the personnel, continue to pay them for two years which is a reasonable amount of time for them to find work.

This would also include replacing the IRS and federal income tax as we know it with some sort of flat tax for everything except groceries, anything to do with healthcare and gasoline (including home heating oil or natural gas). [snark]Maybe we would charge a double flat tax on soda though.[/snark]

This idea is only half-serious but the federal government is too big and there is plenty of redundancy with what the states do. The savings from selling some building, no longer paying rent on others and no personnel costs (after two years) would result in a colossal savings.

A little more serious we have this article about the Chilean stock market. The article notes that Chile has lagged some of the other Latin American markets this year, which it has. The chart covers two years and reveals some interesting action.

The big reason I invest in Chile, and why have written about it so many times over the years, is captured in the chart. Chile is a commodity based economy that is generally very conservatively run. This created the chance that it could go through cycles on a slightly different timetable than the US market which is what happened; it bottomed out much earlier and the ride down was much less.

Also included on the chart is the Bovespa Index from Brazil, another market I have been a fan of for many years. That peaked much later than the US, bottomed out at about the same time and has come back much more than the US. Chile has sort of split the difference between the US and Brazil. In the context of needing to invest more into foreign stocks there are not too many emerging markets that are less volatile than the US. I have owned one of the banks for clients, there is also an ETF from iShares and a closed end fund along with several other individual ADRs.

The Patriots-Bills game last night was crazy and not to overly obsess on the little things but did the Chargers powder blue jerseys seem to be not quite, I don't know, powdery enough? It didn't quite seem like the correct shade of blue, anyone else notice this?
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Quick Thoughts

The foreclosure rate appears to be going up. Maybe the rate and persistence of the increase is open to interpretation but more foreclosures seems like a certainty. Losing his home does not necessarily mean a person becomes homeless and penniless.

Some portion of these people will still have their jobs and be living somewhere like in an $800 apartment (versus a recently adjusted $3500 mortgage) or with a relative. Won't some portion of these forcibly downsized people put a lot of their stuff in storage? If so could this be a positive catalyst for Public Storage (PSA), Sovran Self Storage (SSS) or U-Store-It Trust (YSI)? Do you know any other related companies like maybe a Canadian storage trust of some sort?

Lately there has been discussion trying to decipher why gold is going up (presumably signaling inflation worries) while at the same time treasury yields are going down which signals a lack of concern about inflation and might be signaling a deflation worry.

There are several possibilities for this I suppose including no reason at all but there is one possibility that I have not read or heard anywhere but I am sure that someone has thought of this somewhere.

For simplicity sake let's say gold is expressing an inflation worry and bonds are expressing a deflation worry. Isn't it possible that that each asset class is working on a different timeline? For example gold is worried about inflation in five years while the bond market is worried about deflation right now and for the next, say, two years?

The first flaw I can think of for this line of thought is that I would expect the ten year treasury to look further into the future than gold but the idea of different asset classes being on different time lines seems worth thinking about.

A spirited debate about social safety nets of healthcare and other entitlements broke out in the comments yesterday. I figured out how to articulate my thoughts on this subject and they will be very unappealing to some. In yesterday's post I made a remark about having enough money saved for some sort of medical thing that turns out to not be covered.

I do not want to be in a position where my fate is decided by someone else like an insurance company. If a person needs something medical done and insurance will not cover it and they cannot pay for it out of their savings then yes that is a rotten outcome but there is not much I can do other than pay whatever taxes I am told to pay.

People give themselves a better chance for avoiding this sort of problem by working longer and staying fit. Working longer means less time living off of savings. Staying fit reduces the odds of certain types of medical problems. If you love your work and are motivated to keep doing it until you are 80 then I have to think that the only things in the way of that would be any sort of medical thing or dying. In this case the savings becomes a giant emergency fund, most likely for a health event that is either a one time thing or a chronic thing if insurance somehow doesn't cover what you need.

It may seem like I am harping on insurance not covering but isn't that the biggest fear that most people have; some sort medical need that is not covered and not affordable from savings? I am sorry but I am more inclined to try to prevent my own problems than solve someone else's.

On a somewhat lighter note the picture is from the Boston Globe (hat tip to my brother), they have a bunch of pictures posted from the fires in Los Angeles. This particular picture amused me because I have lived it a few times. A few hours after we start an initial attack on a fire we see a scene similar to the one in the picture; that is a bunch of dudes (typically hot shot crews) half my age marching to the fire single file to relieve us.

On a much lighter note did you see the end of the Broncos-Bengals game? That was crazy. Directv gave away Sunday NFL Ticket for free yesterday and I took in quite a bit of the Red Zone Channel, what a great idea. No we are not getting it, only the baseball package for us...for this year anywayXD
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Sunday Morning Coffee

This past week I had a chance to visit with some neighbors. We have known these folks (not the neighbor with the backhoe I have written about before) since we moved to Walker full time through the fire department. They had a financial worry that turns out is not a problem. In assessing that it was not a problem I was able to get a sense of their financial picture and came away quite impressed not with what they have accumulated but what they have not accumulated which is debt.

If your only fixed expenses every month are utilities, food, insurances, gas for the car and taxes (more like quarterly and semi-annually) then how much money do you need to have? Not how much do you want to have, how much do you need to have?

Add to that the willingness to work. He works maybe a week or two a month some in his construction trade and doing some wildland fire work (there are all sorts of jobs on big fires that do not involve scratching out a fire line for 12 hours a day) in the summer.

It doesn't take much to pull in an extra $1000-$1500 on top of social security if someone is resourceful and willing to work. That may not sound like a lot of money but if there is no mortgage, no car payments and no other debt to service then it is a very useful amount of money. BTW I have no idea what my neighbor makes doing the sidework mentioned.

Obviously not everyone is healthy enough to do physical work into their 60s and beyond and I certainly hope to have a pile of money saved in case either one of us needs a six-figure, life-saving toe procedure (trying to keep it light) that health insurance won't cover.

We can control our indebtedness, live below our means and I will say take the time figure out some sort of work to do even with physical limitations. This is not to say people should never do anything fun, or that they should sleep in sleeping bags and sit on lawn furniture in their homes but if the monthly nut can be whittled down to just the things mentioned above without a $2500 mortgage, $900 in car payments and credit cards it makes financial success much easier to attain.

The focus of personal finance is almost exclusively on how to make your nest egg bigger. A decade like this one is a reminder that not everyone can grow their nest eggs to the sky. If you are flat for the decade (before new savings) then you are miles ahead of the market which is great but you are still flat for a big chunk of your investing lifetime. You can work hard at investing and might have some combination of luck and skill but it makes a lot of sense to also devote time and energy to the things that you will have a much better chance of controlling.
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The Big Picture for the Week of September 13, 2009

A few random items this morning.

IndexUniverse posted an excerpt from the July issue of ETF Report about thematic investing that includes a few comments from yours truly. Being from the ETF Report it is obviously focused on ETFs.

The themes isolated in the article were alternative energy, coal, nuclear, commodities, infrastructure, transportation and green. I'm not sure those are all themes and I am surprised water wasn't included especially since that was the one I talked about.

Rick Ferri was quoted in the article as well saying that they are gimmicky, make for sales pitches by brokers and that “we don’t use any thematic funds in our management here.” The thing about themes is that often money must be spent on them. Like with infrastructure, the money is going to be spent. This we know. From that we may infer that the stocks involved have visibility for doing well, maybe even outperforming the sector they are apart of.

If you look at the industrial sector it is very likely that every theme in the sector has outperformed every large cap sector fund for the simple reason that large cap sector funds all have heavy exposure to General Electric (GE). Note that I am saying themes in the sector not thematic ETFs in the sector because many of the funds are new and for the short term anything goes but over the entire decade GE has not done well.

One thing that the excerpt did not capture (I did not see the entire article) is how to use thematic products. I have been writing about this for a while now. But themes fall in as being part of a sector or two. So a thematic ETF that is 70% industrial stocks can be thought of as a proxy for the industrial sector. Depending on the size of the portfolio the theme fund could be the entire sector allocation or one of several things. For example with energy a portfolio could have 4-5% of the portfolio in a coal ETF, 2% in a service company and 5% in the big oil company from some foreign country and you're in the vicinity of equal weight versus the S&P 500.

Obviously this could be done entirely with individual stocks but the point is that this is becoming more and more doable with ETFs.


Last weekend Nassim Nicholas Taleb was on WealthTrack with Consuelo Mack and he had a great one-liner. He said that "you would not invest a penny in the stock market if you understood the risks." He went on to say that people do not take these risks because of courage but because of "ignorance." Ouch.

Underneath that I would note that proper understanding of risk is a never ending pursuit.

Last night early on during the Red Sox raindelay NESN reran a documentary called Yard Work about whiffle ball. Adults play, the pitching is crazy, the ball almost unhittable and the game is similar to Over The Line played on the beach in Southern California and a game I played as a kid (back east) called Left Field except those games are played with normal equipment (OTL has a slightly different version of a baseball).

Also during the rain delay was the story of Ken The Hawk Harrelson. I had no idea.

The picture is from a call for a cat up a tree yesterday. Click on it to see what is really going on there. Joellyn and I met another couple at the cat owner's house. He (not an internet person and probably would not want his name mentioned) climbed up to the top of the tree which I would say was 60-70 feet high. The cat scratched up him pretty good. He handed the cat off to me at the top of the ladder and I got him the rest of the way down. Shockingly the cat was not pleased to see either one of us.
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The Next Five Years In ETFs

That is the title to a post by Matt Hougan over at IndexUniverse. Five years seems like a long time for the ETF industry think of where it was in 2004 versus now. The next five years could see even more change than the last five.

In his post Matt talks about seeing a few funds in the filings that could become very important but doesn't say which ones. He also mentions big firms that are not yet in the business, like Schwab, getting in and staking a big claim. There are many S&P 500 index traditional mutual fund so there can be more than a couple of SPX ETFs.

The other point he made that stuck out to me was some ETFs being targeted to investors while others are targeted at traders. Interestingly there was no mention of actively managed ETFs (I think actively managed ETFs are huge so what).


I would add that by 2014 we will have flying cars and be eating all our meals in pill form. Ahem.

The biggest thing may not be ETFs but what gets done with them. One of the great things about them (and I am surprised how few people touch on this) is that because they are indexes mostly (even the narrow based ones) you know what you will own six months from now. Not so with actively managed products. This makes integrating them into a portfolio seeking specific effects is easy to do. If BP and Total (TOT) are the two largest stocks in your energy ETF today, chances are they still will be six months from now.

Given the potential utility this offers I think we will see products the bundle ETFs together in search of some other effect. Maybe this means long short or customized pairings like something that is 75% materials ETF and 25% one materials stock or anything else. Maybe they would be called Alpha Bundles or Core (the narrow ETF) & Explores (the stock). These would allow brokerage firms to market research ideas into investable products that are less risky than just buying the stock.

To be clear I'm not saying these will be good things, should they come, but they would be a way for brokerage firms to stay relevant and offer more than SPY/IWM/EFA combos to people.

I imagine there will be more country funds (GlobalX has an Egypt fund in the works), currency funds (WisdomTree filed for just about every currency but I have given up on them actually listing them) and a lot needs to happen with fixed income ETFs. Matt mentioned that he thinks the PIMCO TIPS funds (there is three of them now) will turn out to be important. ETFs bring more to the table than a lot of people realize,a t least for now. More market participants will see the real value and make more effective use of them.
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$80 Billion Dollars!

That is the number sloshing around the interweb this week first brought up by Larry Swedroe and it represents the cost to investors of actively managed portfolios that lag benchmark indexes. Apparently "studies have indicated that the vast majority of active managers fail to capture alpha on a regular basis."

These debates come up all the time and it is pretty clear that the data can be mined to say whatever someone wants it to say. Generating alpha against some equity benchmark is not the goal for many very wealthy people, I mean really wealthy. There are also plenty of people who have below normal tolerances for volatility.

I do not know what percentage of the investing population that might have been studied is either too wealthy or too scared but these are real segments of the sample size.

I do know that these debates are far too generalized and thus cloud the issue. I said many times before that for some people passive is the way to go but for others active works very well. Further, the $80 billion number is for one year. Hussman has said (and I agree) that it makes more sense to consider this over the entire stock market cycle.


What about risk adjusted returns? In years past I have hypothetically asked readers to weigh in with their thoughts about a strategy that captured 80% of the upside with only half the downside (this is in the same neighborhood of what John Serrapere tries to do) and based on those past posts it was very well received. Well obviously anyone pursuing something along these lines is not trying to capture alpha on an annual basis.

On December 31, 1999 the S&P 500 closed at 1469. At 1033 going into the open today it is down 30% (not including dividends) for the decade. I would venture to say that if you are meaningful ahead of the SPX' result for the decade that that is far more important than whether you added alpha in 2004, 2005, 2006 or 2007.

People believe what they believe and should do what is right for them but many of the debates on this subject are far too simplistic.
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State ETFs Coming Soon

Later this month we will see the first of the state ETFs listed. One will be for Texas and the other from Oklahoma.

You can look at the index components at the AMEX website (Texas and Oklahoma). The Texas fund will be some sort of proxy for domestic large cap and the Oklahoma fund will either be a proxy for mid or small cap. They will both be heavy in energy and Texas looks like it has a lot of tech but I have not done a sector breakdown yet nor was I able to find one.

I will probably do a write up on them for theStreet.com but I have to say I will be shocked if anyone cares about these funds. This is not to say the funds will be flawed or defective just not relevant. I have not read any marketing material about the funds but I presume they are targeted to some audience but that audience would likely be very small and it's not like 100% of that audience is going to buy the fund.

In the past people from the various fund companies have tried to convince me of the utility of some funds and often there simply isn't any despite the story they are telling. I am quite certain that will be the case here.

Sorry for the short post, a very hectic day coming.
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Medical Tourism?

Barron's had a fascinating article this weekend about something called medical tourism. The basic idea as put forth in the article is that US insurance companies are slowly starting to encourage policy holders to go abroad for medical procedures. The costs are shockingly cheaper than the US. Barron's said that the costs including flying there with a companion, having a short stay and getting the procedure could be half or even less than half the cost of the same procedure in the US.

The concept is a new one on me and I find it fascinating. The typical context along these lines in past blog posts has been if you move to a foreign country what would you do for medical care. While I have no plans to move anywhere there is something intellectually intriguing about living in New Zealand or Uruguay or the like. So the idea of medical service in another country is fascinating (repeated from above for emphasis).

The countries mentioned in the article were India, Thailand, Singapore and Panama but really far more attention was given to India and Thailand. Without repeating the entire table of examples a heart bypass procedure that Barron's estimates at $70,000-$133,000 in the US would cost $7,000 in India, $22,000 in Thailand, $16,300 in Singapore and $10,500 in Panama.

The article did not really address quality of care in great detail and I do not know about this (anyone who does please comment on it) but in terms of financial consequence this is truly game changing. The motivation of the insurance companies for this is obvious but if this sort of thing could generally put some sort of downward pressure on medical costs or slow down the rate of price inflation then it could be a positive for the insured as well.

It also raises a question about what type of health insurance coverage to have. If you need a hip replacement, your insurance covers it and somehow the insurance company convinces you to go somewhere else then fine but if your insurance wouldn't cover a hip replacement for whatever reason or you do not have insurance at all then going to Singapore and paying $12,000 for the procedure, $2000 for airfare (the low end of the range for two people leaving from Phoenix) and maybe another $5000 for who knows what else adds up to less than $20,000 and becomes very doable even if you have to borrow every single nickel for the trip.


Flying to Panama looks to be close to $700 per person, Barron's says a new hip would be $5500 there so the whole thing might not even be $10,000.

Obviously no one would prefer to go into debt for $19,000, or $10,000, but these are not ruinous amounts for anyone who needs to.

If the care is comparable then living in New Zealand becomes a little easier (15 hour travel time to Singapore) assuming you can find and not have to wait to see a primary care physician. Ditto Uruguay to Panama (coincidentally also about 15 hours travel time).

This is an investable theme. Barron's mentioned five stocks, four of which I was able to find US five letter designators for but it you have any interest you need to verify the symbols are accurate. From Thailand Bumrungrad Hospital (found two symbols, don't know which is correct BUGGF and BUHPF) Dusit Medical Services (again found two symbols, don't know which one is correct BDULF and BDUUF). From Singapore Parkway Holdings (PKWHF and PKWXY, don't know if the ADR symbol is active) and Raffles Medical (RAFLF).

This was the first I've heard of this theme and it is interesting on some level. If this a viable investment theme then it becomes a way to access certain countries via the health care sector and there might even be more stocks and countries than the ones listed. Parkway Holdings has a 0.42% weight in the SPDR International Healthcare ETF (IRY) with none of the other stocks included. The WisdomTree International Health (DBR) doesn't own any of them and neither does the iShares Global Healthcare ETF (IXJ).

If the quality of the healthcare does not stand up then there is diminished utility from a personal finance standpoint but the article implied the motivation in these places for this to work is very strong. For now more learning is required but for now how about exercising more and drinking less soda?
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Economic Theory During College Football

Long time reader TomK asked for my take on this article by Jeffrey Rogers Hummel titled Why Default On US Treasuries Is Likely.

I'm going to keep this short, I had planned to take the weekend off from all writing.

Hummel's argument appears to be a combo of ideology that is very reasonably backed up with plenty of numbers. To be clear the argument is compelling.

It is a long post. Earlier in the week I read something similar elsewhere (sorry don't recall where) that explained it very succinctly; when your minimum credit card payment no longer covers the monthly interest you are in big trouble. Hummel's post says this in a more articulate manner by focusing in on government spending as a percentage of GDP and taxation a percentage of GDP and how the numbers, where they appear to be headed based on what we know today, simply cannot work.

Possible (or probable?) outcomes include inflating our way out, "repudiating" the debt (which he feels is more likely) and as an olive branch of sorts he talked about shuttering the medicare program. Obviously all three are unpalatable across many fronts.

I am not the guy to outdebate the author or figure out the solution but I felt there was one glaring omission from the article. Inflating or repudiating has dire consequences for the many countries who hold and continue to buy large amounts of US debt. Quite a few countries own too much to just sell because who would buy? Additionally the extent to which the greenback is the currency used in many transactions globally and the number of countries that peg to the greenback creates an urgency (either now or in the future) to seek out a globally coordinated solution.

That is not to say a globally coordinated solution could be found and successfully implemented but for me to agree with the conclusion drawn in the article I need to see this point addressed even if it is subsequently shot down.
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Checking In With Farmland

Yesterday Seeking Alpha ran a post called Protect Your Money With Farmland written by T. Marc Schober who has had four posts run on Seeking Alpha which were all about farmland. I've mentioned investing in farmland several times including this post with quite a few stocks that may be related (to the extent you care you would need to research these names from scratch). I also wrote about this for Greenfaucet a while back as well. I found this post that has Jimmy Rogers' thoughts on the matter and Marc Faber is a fan as well if you care to search for anything from him on this.

The Schober article mentioned above is short on detail. I left a comment asking if any of the publicly traded companies in the space can serve as proxies (something I am trying to sort out). I also asked about whether the economics (my meaning was the subsidies) interfere with the theme. Every time I mention these one reader brings up the difficulty along these lines which reminds me that Schober mentions some eye-poppingly good return numbers but doesn't provide attribution.

The motivation behind this quest is the belief that the old ideas about asset allocation will continue to need to evolve to include other things. In the last few years we have collectively come to learn much more about commodities than we did before and many more of us are using exchange traded products to capture the space. Ditto in much smaller numbers with absolute return vehicles and maybe currencies too.

These tools have hopefully helped people fair better than the S&P 500's decade-to-date 31% decline (SPX closed at 1469 on December 31, 1999). I think more people will get on board with this but I believe the concept will have to continue to evolve into more choices while walking the fine line of going from hedging an equity portfolio with small exposure to diversifiers to owning a bunch of diversifiers hedged with a little equity exposure. Remember the market action from this decade, as bad as it has been, is not radically different from what has happened a couple of times before and going forward (foreign?) equities are likely to be the best way to go until the 2030s or 2040s when we have another lousy decade.

I have viewed farmland stocks as potentially replacing REITs as diversifiers. Despite a reader accusing me of something called recency(sp?) bias the last time I mentioned this I have given up on them as being diversifiers. I've been interested in farmland stocks for almost a year and half and still have not drawn a final conclusion but that is just part of the process.

There are non-public vehicles for buying into farmland and I suspect there will be exchange listed vehicles at some point if the stocks out there turn out to not be the way to go.

What do tarantulas have to do with farming? Nothing but long time readers of the blog may recall that we get tarantulas here every fall and this guy is the first one we've seen. Actually my wife is the one who saw it and took the picture.
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Dennis Gartman Has Been To Walker?

Well probably not but the following quote in the FT makes me wonder;

We’ve been disdainful of the Gold Bugs during our entire career, seeing most of them as gun-toting, canned-food hoarding, doomsday-awaiting crotchety old geezers with little good to say about society generally, and much bad.

For anyone new Walker is the old mining town in Northern Arizona where I live.
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Fever

Last Friday I was on CNBC to talk about value stocks and before Scott (the other guest) and I could spit anything out we were on to the wild trading action that has been going on in Fannie, Freddie, AIG and Citi (feel free to comment any others I may have missed).

Amusingly (to me anyway) I called it a fever, that word just popped in and I went with it. If I may expand on my nine second sound bite...

These short manias happen from time to time. I brought up the example of Comparator Systems from the mid 1990s another one from roughly the same time was Andrea Electronics, there have others before and more importantly there will be others in the future.

Michael Kahn mentioned the current episode in Barrons yesterday.


This is one of many behaviors that repeat over and over in the market, that is just how it is. My comments in the segment were essentially if you want to go for it go ahead, people are making money for now and at some point it will end one way or another and the last buyer will be out of luck.

Thinking of this sort of speculation as bad or good is probably the wrong way to look at it. It certainly may not be your type of trade, it is unambiguously not my trade, but this sort of thing comes along every so often, some people make money, some lose money and then it peters out at some point.

If people want to speculate that is fine of course save for the occasional person who does not realize what is going on which is a great stresser for why it is crucial to understand what you are buying.

In terms of any implications for the bigger picture I think of big speculative manias as being warning signs. The widespread willingness to gamble in this sort of manner strikes me as being emblematic of tops be they intermediate or something else. I should say that I have not researched this and so the data could easily prove me wrong but the occasional contrarian within leads me to want to lean a little the other way.
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Baseball Cards As An Analogy For Capitalism?

Yesterday I found this post by Greg Feirman about the decline in every aspect of the baseball card industry. He also links to articles at Sports Illustrated, Forbes and Slate on this same topic. Much of Greg's post appears to excerpt the other three and the other three all seem to cover a lot of the same ground.

The ground covered includes huge declines in volume of cards sold, some blame attributed to too many different types of cards being produced and although not mentioned I think kids are generally less interested which if correct could matter at the margin.

All the articles seem to tie the peak of the industry to the issuance of the Ken Griffey Jr Upper Deck rookie card from 1989 pictured below. In conjunction with that the Forbes article also points to the joint purchase of the famous Honus Wagner T-206 card by Wayne Gretzky and Bruce McNall in 1991 as being the top.

The tie in to the title of this post is the interesting notion that too much competition actually hurt the industry. Competition is supposed to spur innovation and so by extension a better and less expensive products.

In the case of baseball cards, competition appears to have snuffed out the industry. I wonder about the nostalgic interest on the part of baby boomers to own cards from the 1950s-early 1970s (like maybe through 1971 or 1972). These cards are from the boomers' youth. I found a 1963 Topps Mickey Mantle in "good" condition on eBay for $200 (there was another for $5000, yikes), a 1959 Topps Sandy Koufax in "excellent" condition to buy now for $125 (there was a cheaper one and an autographed one for $349), and as a last example a 1956 Topps Willie Mays ranged from $10 up to $800 (presumably depending on condition).

The prices seem low to me for people who love baseball, have a nostalgic sense of the game and are interested in spending a few hundred bucks. This would seem like it would be enough to put a bid under the hobby but maybe not.

What I think we might be seeing here (and maybe this can be a microcosm for a few other things) is a meaningful shift in how interests are pursued. For many years now Madden Football has been far more popular than card collecting. Whatever the reason people of many ages devote time and money to the video game and fantasy outlets. This is potentially meaningful longer term. I have a FaceBook friend whom I believe is in his late 20's. He's had several status updates mentioning the Madden game and fantasy football. It would be reasonable to think that he, and anyone else doing this, will keep on doing this and introduce their kids to it as well thus killing the future of sports cards.

This is a long way of saying I think what has hurt the sports card industry is competition for time from other related hobbies as opposed to competition from within the industry.

From my own viewpoint I loved cards when I was a kid and I enjoy seeing the old cards (I use pictures of cards in posts all the time) but get no such sense with new cards and have no interest in anything more than owning a handful of cards.
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Another Drawback Of ETFs

Despite the title of this post I'm sure that most people that have read my stuff know that I am a huge fan of ETFs. They allow people willing to spend the time to build very sophisticated portfolios that by and large avoid single stock risk. The broader funds allow for simple and cheap beta for people who for whatever reason do not build portfolios with narrower funds in the capacity I write about.

All that noted there are drawbacks to the product, every product has drawbacks. One written about previously is that it can be more difficult to capture a good dividend yield. Some of the "dividend" ETFs are (were?) heavy in financials and quite a few of the WisdomTree funds have very lumpy dividends.

Look at the dividend stream for the WisdomTree Intl Energy ETF (DKA) which most clients own. First of all the 7% you might see at ETFconnect is wrong because just this year WisdomTree switched to quarterly payouts from annual. So the "7%" is picking up the one annual payout for 2008 plus the two quarterly payouts thus far for 2009. The dividend paid in March of this year was $0.09 and the June div was $0.43. There can be two reasons for the lumpy dividends. One is that many foreign companies pay dividends once or twice per year instead of four times. Another issue for WisdomTree has been that share creations or redemptions have impacted the payouts in the past and this could be an issue at anytime in the future.

Anecdotally it seems like less of an issue now than it used to be but grain of salt that one.

This brings us to the other drawback implied in the title of the post. Yesterday after the close, as I usually do, I looked at how the various stocks and ETFs I own for clients did and I noticed an odd quirk. I should note that I have a quote-widget on my desktop where I have programmed in the SPX, all the big SPX sectors (proxied with an ETF) and a couple of other things which hopefully allows me to have a sense of what is going on during a given session.

The healthcare ETF I follow for this purpose is the iShares Health (IYH) which is a domestic sector fund. That fund was down 0.14% which not surprisingly was better than the SPX' 0.81% decline. The quirk I noticed is that three of the five stocks I own in the sector were up on the day smoothing it out better than the ETF would have.

To be crystal clear one day means absolutely nothing, one day is a quirk and anyone with a diversified portfolio of 30-50 stocks had names that were up yesterday. But it does raise an interesting issue. In just owning one ETF to capture the sector there is no chance of adding value over a more reasonable period of time by picking a stock. There is also no chance of lagging by picking a stock either.

In using an ETF for a sector you are giving up the chance to outperform at the sector level. This potentially becomes a smaller issue the narrower ETFs become. For many people this opportunity cost is probably small consideration but it is a drawback. For example one health name I have owned for years now, and disclosed many times before, is Teva Pharmaceuticals (TEVA). This is far from an obscure name. It has outperformed IYH dramatically for 5yr, 2yr, 1yr and YTD according to the chart on Yahoo Finance but has lagged for the last six months and I did not look at any shorter time periods.

Picking a big theme like generics and picking one of the largest stocks in a market (Israel) is a long way from uncovering a hidden gem or adroitly picking a stock. I realize not everyone will or should pick stocks but that does not mean you should not fully understand the drawbacks of the products and strategies you use.
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