Wednesday, March 31, 2010
Achuthan feels we are in for more boom and bust cycles and so with that backdrop he feels buy and hold is not the best strategy. The comments were also interesting ranging from they're all crooks, to Bogleheadesque comments to comments agreeing with Achuthan.
Framing the argument in such definitive terms doesn't make sense to me. We all know that the S&P 500 was down 24% on a price basis in the last decade, adding in dividends it was down 4.5% for the decade. Whatever the result of the index obviously some stocks did better than the index and some did worse.
For the decade Caterpillar (CAT), a client holding, was up 142%. While there were a couple of trading opportunities along the way someone who held on for the entire decade added a lot of value with the pick. Even someone holding on during a couple of big declines for the name had a lot of luck with it for the decade.
Contrast that with Citigroup (C) which was down 91% for the decade. The stock spent most of the decade between $40 and $50 before rolling over in 2007. I've never owned Citi so I can't really pinpoint exactly when the story changed but after doing OK for quite a few years the story did change. I can only relate the financial stocks I sold; Bank of America for buying Merrill Lynch, Barclays in December 2007 because the UK was obviously in trouble and Allied Irish Bank in June 2008 as Ireland appeared to be deteriorating faster than most other countries. BAC was a very specific event and the other two were more nuanced than that.
Another example of a stock that was generally better to hold was ITT, not a name I own but recently profiled in Barron's. It was up 274% for the decade.
Over the next decade, assuming that Achuthan is correct, there will be stocks that outperform the index and stocks that lag it. In a portfolio of, for example, 50 stocks assembled today it is a very good bet that a bunch will indeed turn out to be good holds for the entire decade and that a bunch more will not. While I hope that is an obvious point it is also true.
Anytime a stock is purchased there are reasons for that purchase that are either bottom up, top down or a mix of the two. Forgetting about any tactical moves tied to sizing down or the like for a moment as long as the bottom up, top down or mix of the two that made the stock a buy are still in effect then generically speaking there is no reason to sell. When the story matures, evolves or proves out as being incorrect the stock is a sale. When has that ever been different?
I've said many times that I expected to hold Bank of America forever but it did not work out that way. After more than four years I sold it. I have some stocks that have been in client accounts since 2003 (before I joined Your Source Financial). I expect to hold these few names forever but if one of then does the equivalent of buying of Merrill Lynch then it would need to be sold. Again, when has this ever been different?
Tuesday, March 30, 2010
Hyman Minsky is celebrated posthumously for observing that very extreme events occur as a result of long periods relative tranquility which creates complacency. The complacency then gets shattered by something like Bear Stearns or Lehman Brothers blowing up.
Are we now in Extremistan? When will complacency return so we can all go back to making money again? Candidly I do not frame it this way. I think Minsky's idea holds plenty of water and I don't think disagree with Taleb, I just don't think in terms of tails in the manner that Taleb (and Hui) writes about them.
Where extreme events are concerned I think about avoidance more than anything else. For my money S&P 500 sector weights give ample warning of trouble (but not magnitude). This worked with energy almost 30 years ago, tech ten years ago and financials three years ago. For people who have been reading this site for a while, are you going to overweight the next sector that comprises 20%, or more, of the S&P 500? In the last decade I think choosing the correct sector to avoid has been the most important decision possible regarding domestic stocks.
WRT to foreign stocks figuring out what countries to avoid (Japan and big Western Europe) may not have been as important as picking Brazil or a couple of others but avoiding those countries did make things much easier.
Obviously some folks would argue that just as it is impossible to pick stocks it is probably impossible to correctly avoid stocks as well. One such person could be Jack Bogle. He was profiled in the LA Times. He is widely known as a proponent of indexing but as the LA Times article notes (I have mentioned this once or twice as well) he is pretty good at making macro market calls. I find it fascinating that one of the foremost indexers is a pretty good timer.
Bogle isolates a key point about the pitfalls of emotion. Paraphrasing him from the LA Times article people look at their statements, see something they don't like and end up selling low only to be followed later by buying high. I agree that emotions are one of the biggest threats to investment success, maybe the biggest.
Where I disagree (actually there are a couple of things I view differently than Bogle does) is that indexing worked over the last decade. I don't think it did. The Vanguard Total Stock Market Fund (VTSMX) was up 4.1% last decade including dividends and the S&P 500 Total Return Index was down 4.5% (both numbers per Morningstar). Recently I cited an article written by a fund manager who believes people realistically only have 20 years to accumulate for retirement. While I think people have more than 20 years it makes the point that no growth for ten years can be a big problem and while a repeat of that this decade is a low probability I would not want to bet/rely on indexing working in this decade.
To the extent Extremistan exists, to the extent we will have future Minsky Moments and to the extent our emotions are our worst enemy the focus here will continue to be avoiding certain sectors, countries and themes. The behavioral finance nugget about the emotion of losses dwarfing the emotion of gains rings very true and I think reducing the chances of huge losses is the most effective way to navigate through. New readers can search for my name with the term 200 DMA for more details.
Mercifully Fox has not renewed the show 24 so when the current season ends in May that will be it. I used to love the show and have stuck with it last season and this despite how bad it has been all the while hoping they would pull plug.
Sunday, March 28, 2010
My initial answer was simply to note belief that whatever the consequences of the financial crisis and the attempts to "fix it" will be they will play out over a longer period of time than people like Mish (a must read) and Peter Schiff call for.
Right or wrong the reason I feel this way is the extent to which the US is enmeshed in the world economy. Additionally I noted that reasonably speaking interest rates should have been much higher than they are now and part of the reason is the foreign interest in US paper but of course the debt that has been bought by the Fed has hurt either.
Weakly supporting the idea above about consequences happening slowly is the speed at which Iceland, Greece and Ireland ran into trouble. I use the word weakly because those countries are different than the US but still.
Then a couple of other things that have occurred, some anecdotal, that I think can also contribute to the slow motion wreck theory.
A fraternity brother of mine (actually my roommate during my junior year) and his wife are both teachers in California (but not in a big city) and if I am following his posts on Facebook correctly they have both been given pink slips and looking for jobs in another state. California as we all know has a slew of problems both of its own doing and as a result of the financial crisis.
What date would you put as the start of the financial crisis? While there may not be any single answer most would agree it has been at least a couple of years. So a couple of years in, or more, and California is just now getting around to trimming payrolls (or they have laid people off previously and are still going)? I don't know the numbers of the layoffs but it would be reasonable to conclude that some folks effected will miss mortgage payments maybe with a little delay or maybe not.
My sister in law is a teacher here in Arizona and her job will be lost unless a one cent sales tax gets passed by voters. Again some portion of the teachers effected will miss mortgage payments with a little bit of a delay or no delay.
California and Arizona have been two states effected more than most but many states have problems with various taxes collected, pension obligations and budget deficits. More states will have to make painful cuts, this is clear. What is not clear, to me anyway, is the magnitude of the impact or the timeline. This could easily be in slow dribs and drabs, indeed it is starting now, a couple of years or more after the start of the crisis, in the states that are the worst off. Most states are better off than California and Arizona but in trouble nonetheless. I imagine some will avert desperate measures but some will not but I don't think we will know for several more years.
Karl Denninger noted some of the immediate aftermath of the passage of the health care bill. He detailed announced writedowns due to increased costs resulting from the rules of the bill by Deere (DE), AT&T (T) and client holding Caterpillar (CAT). Denninger noted that most of the effects aren't supposed to occur for several more years but are starting now. Ok starting now but even proponents have to concede that there will be more impacts later, so playing out over time.
Barron's noted another consequence related to job creation. Whatever the magic number of employees is for offering health care coverage why would a company, to use Barron's example, with 48 employees go to 51 employees? The expense incurred for health care compliance would be a deathblow for some, obviously not all and maybe not even half, companies effected.
This outlines one source of jobs for displaced state workers that will either not be there or will have fewer jobs for displaced workers.
In working through this I am not trying to predict a magnitude because I don't know. What seems clearer is that this plays out slowly with successive dominoes falling. If the crisis was as bad as we were told (worst in 80 years) then it should, as I have been saying all along, take a long time to play out. Additionally the fixes will have consequences of their own, like encouraging people to stop paying their mortgages in order to qualify for a new program, that will take a long time to play out.
I have been consistent from the start that this would not feel like the Great Depression, not even close, but I do believe we will look back on the totality of the event and refer to it as a depression. There were several depressions before the Great one, I believe the early 1920s, there was a bad bank panic in 1907, another depression in the 1870s and I am quite certain there were others so if the current period is labeled as such it will not be the end of the world and we are already a long way into it.
The picture is from the far east end of Molokai.
Saturday, March 27, 2010
The reason for the picture today is to make a point that hopefully has use in investing and other aspects of life. On my right hip you see a big black thing, that is my fire shelter which is essentially an aluminum foil sleeping bag thing that one would deploy as a last resort in a wildfire.
Yesterday I participated in an all day regional fire exercise. I was decked out as you see me in the picture all day as we did various related field exercises. For someone who is just going to be working on a fire for a day the fire shelter is going to be the heaviest thing by far they have on them at least for me it is. As Friday wore on I started getting a cramp of sorts, more like an ache, near the shelter. So I thought about it for a minute and realized, duh I'm lopsided. The reason to have the shelter where it is, instead of at the back of the fire pack is that it is much easier to get to right there.
As day today was just an exercise and not a fire there was zero sense of adrenaline and so I never noticed before. When I had a minute I reconfigured the pack to put the shelter behind me (still easily reachable because when a firefighter does deploy they are supposed to take their pack off. I made a funny comment about it (making fun of myself) to a couple of guys on the crew I was assigned to and one said "it changed your life, didn't it?"
While we'll see what happens this summer (or hopefully not), maybe the hike to the Bannie fire would have been easier had I been a little smarter with how my pack was configured. I have had the pack configured that way for the last six fire seasons (had a different pack before then) and did not know it was making it more difficult, a couple of minutes reconfiguring and bam, it changed my life.
However savvy one might be with their portfolio construction and cycle navigation there are probably little things they do that creates the effect of causing an unnecessary ache, so to speak. My little discovery came after 20 minutes of working on a fire line where there was no fire. A similar type of discovery about investing is unlikely to come so quickly which is why it is important to continue to invest time learning more.
Friday, March 26, 2010
From an investing standpoint you may be aware of lead singer Bono's affiliation with Roger McNamee and a couple of other people in the investment firm Elevation Partners. McNamee has been on CNBC a few times since the formation of Elevation Partners to talk primarily about their investment in Palm and the merits of the Palm Pre.
You probably know that except for about ten minutes the market place never cared about Palm Pre and that the stock has been crushed as a result. In addition it appears that Elevation is down big on investments in Forbes and Move.com. This bad luck or poor decision making has caused 24/7 Wall Street to call Elevation Partners "arguably the worst run institutional fund of any size in the United States." Here is a link to a related story from the Biz Journal that has other information.
Obviously I have no basis to know whether it is the worst run fund or not and obviously McNamee and the rest of the investment professionals did not get to where they are being idiots. I'm not sure what has gone wrong but obviously risks were taken that have not worked out thus far.
If guys with very good track records can misfire than anyone can misfire. Funds like Elevation Partners will probably become more easily available in the future. Some will be great and some will stink. This is not my preferred vehicle obviously but as they proliferate some folks may be interested in giving it a shot. It is important to realize that there is no stop order available. Your money is locked up for some period of time and that is that.
These types of pools, assuming I am right about being available to more people, make things far more complicated than a mix of stocks and mutual funds. To repeat from many past posts, I prefer simple whenever possible in all aspects of life.
My wife and I saw U2 in concert in December 2001. Among other things it was right after the Diamondbacks won the World Series. During the encore Randy Johnson came out on stage with the World Series trophy and the place went berserk. Obviously it made a big impression.
Thursday, March 25, 2010
The health care passed (I guess, but now states are suing to block it?) and what I know I do not like. The point here will not be to debate the merits, we are all entitled to our viewpoint and that is mine. But even the people who support it should be skeptical about it somehow not costing more. I think people should be skeptical of the CBO estimates being relied upon by the proponents of the bill.
When the idea of it being deficit neutral first popped up I was skeptical. The more I thought about it I simply don't believe it. I am not sure if if the politicians saying it will not increase the deficit really believe it (makes them idiots), are lying (makes them liars) or have somehow adopted a George Costanza viewpoint ("it's not a lie if you believe it").
My skepticism of politicians goes back to 8th grade (a story I've told before) when our congressman, Father Robert Drinan, yes he was a priest, came to speak to our school. I asked if he would support Ted Kennedy for President and I got a two minute non-answer. Drinan was succeeded by Barney Frank--seriously. I think, but am not sure, that the lines have since been redrawn such that my hometown is no longer in Frank's district.
Part of my opinion on the healthcare bill stems from my belief that collectively it is not possible for them to write a bill so comprehensive that it can get everything right. As I observed how both sides were bickering over this I was not able to discern where wanting to improve health insurance ended and ideology began. The way I view things ideology drifts into the realm of emotion and when emotion is involved the quality of the work usually suffers.
Serious question have there ever been politicians that seem to be a deranged at Nancy Pelosi and Barney Frank? Frank's behavior at the start of the Geithner visit the other day seemed very bizarre. Was Newt Gingrich this type of crazy? As a Libertarian I dislike all of them but these two seem to lack basic decorum. I know they never lose elections and for all I know run unopposed but do democrats like these two? Despite how the paragraph reads I am trying to be serious, do people who vote democrat actually like these two?
This leads me to financial regulation. How can this dysfunctional unit (senate and congress) possibly cull together an adequate regulatory structure. I am not saying we don't need an overhaul I am saying the people empowered to do it (per the joke I posted yesterday were there really congress people who did not read/understand the healthcare bill?) are woefully ill equipped to do the job properly. How can we be confident that what they produce doesn't make it worse.
So many of the questions asked of Geithner, Bernanke and Volcker are so elementary by congresspeople, congresspeople on related committees mind you, that it creates the appearance buffoonery. I realize there could be a political reason for asking very elementary questions over and over, but if they never get to the difficult ones then confidence is not instilled that they understand the magnitude of the problem they are being tasked to fix.
Yes changes need to be made but I simply don't believe they know how to do it.
This is not intended to be purely an anti-democrat rant as I think just as poorly of Bush et al.
Wednesday, March 24, 2010
People are buying more cars and driving them. This is a positive for the toll road stocks. Even if the banks blow up from too much lending and if the real estate companies blow up from over capacity I believe the middle class ascendancy will continue to be relatively strong which could mean less fundamental impact on these stocks should the rest of the Chinese market implode from here. For now these can't really be bought for clients because I am not sure I could get out of the quantity I would need to buy but I believe it would be easy to get out of a few hundred shares even if there had not been any volume for a couple of days.
We've got new information from the Yale Endowment to digest. I tend to be most interested in the asset allocation targets of these pools more than anything else. Yale's targets as follows;
Absolute Return 24.3%
Domestic Equity 7.5%
Fixed Income 4.0%
Foreign Equity 9.8%
Private Equity 24.3%
Real Assets 32.0%
As this article from the WSJ points out, Yale is not shying away from illiquid assets despite dropping 24.6% in the fiscal year that ended in last June. That compares to a 28.4% drop for the S&P 500 for the same period.
My critique of this is not an I know better but more of a what is practical for individuals. I am a fan of having a little absolute return, we had as much as 5% at one point. But 24% is a big chunk that will probably not participate in up a lot. To the extent that is true it places more importance on being right with the part of the portfolio that should go up a lot when the market does. I also doubt that the absolute return vehicles that individual have access to can be as good on a consistent basis as the absolute return vehicles Yale can buy into.
As for private equity, I've been bashing the exchange traded vehicles right out of the gate as just not being the same thing and from there real private equity funds require locking up funds which I am not a fan of. On a related note I have never been a fan of the currency CD concept from Everbank.
Real assets have a role but 32% is more than I want. Part of this, where endowments are concerned, is timberland from some exotic locale. Including this in a portfolio is very difficult. Sino Forest (SNOFF on the US pinks) is one example of this I know some about and while it has had plenty of feast over the years there has been some hard famine and I'm not sure that the correlation to the S&P 500 is that low. It seems to go up more when SPX is going up and go down more when SPX goes down.
I also do not want a lot in commodities. We had about a 5% weight for a while but it is less now. There was no mention in the section of the Yale report about Real Assets on how much, if any, of that portion is in commodities but at some point commodity exposure goes from being a diversifier to the core asset and given the volatility characteristics of many commodities that is not where I want to position.
Over the weekend I did a little reading on Vanuatu, hey it could be an investment destination one day--it is an agricultural society. While there is not much to say now, the currency, pictured to the left, is neat looking.
IndexIQ came out with a small cap fund for Australia with symbol KROO and for Canada with symbol CNDA with plans for a bunch more. These join small cap funds from Japan and Brazil from other providers. I'll be writing about them for TSCM next week or the week after but for now I will say that I think these are a big deal. A big problem with country fund investing is the extent to which many of them are heavy in financials. CNDA is about 6% financials and KROO is only about 10% financials.
Finally a little humor from a friend about the health care bill;
Let me get this straight......We now have a health care plan written by a committee whose chairman says he doesn't understand it, passed by a Congress that hasn't read it but exempts themselves from it, to be signed by a president that also hasn't read it and who smokes, with funding administered by a treasury chief who didn't pay his taxes, all of which is to be overseen by a surgeon general who is obese, and financed by a country that's broke.
What could possibly go wrong?
Tuesday, March 23, 2010
The image is the yield curve as posted on the Schwab Institutional web site from a few minutes ago. Last night there was something of a debate about this in the comments of yesterday's post. There were a few mentions of this around the web.
If you click on the image you will see that nine months out is the only point where AAA corporates yield less than treasuries based on Schwab's inventory. Well actually I found a two year corporate rated AAA yielding 1.135% versus the 1.183% on the matrix pictured above. The yields on the matrix are the highest available.
The inventory of three year AAA corporates are multiple offerings of the same issue with yields ranging from 1.564% you see on the matrix down to 1.275% versus 1.530% for treasuries. I should note that the 3 year corporate in question doesn't actually mature until May 15, 2013.
For what it is worth there are several Berkshire Hathaway five years, AA rated, with yields right around 2.7% versus the 2.405 for five year treasuries.
For now this is merely interesting and worth paying attention to. It is either an anomaly that will be explained after the fact or it is significant. I'm not sure and of course paper offered is not paper traded. I have no conclusion yet but it is interesting.
That is a lot of tasks many of which are full time jobs all by themselves. This is one reason why RIA firms hire a sub-advisor. Another reason could be that for some firms, the skills the partners bring to the table, it makes sense to hire out for portfolio management expertise. This isn't that different, IMO, from a rep at a brokerage firm putting client accounts into programs where the assets divvied up amongst various managers; like maybe one for large cap, one for small cap and one for international.
To read the IndexUniverse piece and this one from Barron's it would seem that sub-advising is big and going to get bigger. As with just about every thing there is good and bad to this. First the good which is to understand that people hire advisors for all sorts of reasons and how they manage a portfolio is not necessarily the first consideration. Financial planning can be a multifaceted task and people have all sorts of needs. To the extent someone builds a practice that focuses on multifaceted it is unlikely they have the time needed to construct and manage a portfolio. In this sort of circumstance finding the right person, whatever that means, makes sense and clients will understand it.
The negatives are potential fees and the adding of layers of people. The IndexUniverse article talks about fees sometimes totaling 2% between paying everyone and then if funds, exchange traded or otherwise, are part of the mix. I think the fees adding up to that much is more common in brokerage firm programs. Obviously if you are reading this as a prospective end user you need to understand the fees you are paying. The idea that X% is always expensive or always cheap over simplifies the topic. A fee needs to be reasonable relative to the situation not some arbitrary figure although I can't imagine someone with a few hundred thousand dollars needing nothing special beyond a diversified portfolio needing to pay 200 basis points.
I view layers of people is a big negative as well. An example I have used often is with brokerage firm programs. A manager in one of these programs receives an account to manage has to assume that the asset allocation decision has been made and fully invest the account. This becomes problematic if the client expects assets will be protected. If the broker is not doing that, in this example, then no one is with the context of protection being raising cash for concern of a large decline coming.
In a circumstance where there are layers of people the advisor has to ensure that it is crystal clear about how the account will be managed and the end user needs to make sure they get it and are on board philosophically.
Where I stand on all of this can only be from how we do things. There are all sorts of products like fund of funds, wrap accounts, SAM programs and more that serve to make things more complicated and usually more expensive. I tend to be leery the more sophisticated something is. I have been a big proponent of simple brokerage accounts using some combo of stocks and funds with as little between the account holder and the manager as possible. A reasonably simple and diversified portfolio is very unlikely to cut in half unless the market cuts in half and that can't always be said for some of these other products. No account holder wants there account to cut in half and no investment advisor wants to have to explain why it cut in half. The simpler a portfolio is the less likely you face this situation.
Monday, March 22, 2010
Either way it is truly amazing that something initially conceived for about 10% of the population was put together and marketed in such a way as to be so divisive. The democrats seem to be relying an awful lot on projections that intuitively seem unreliable and the republicans believe this is pure socialism. We'll get an early indication come November and then we'll see how the economics play out in future years.
In general it seems that the investing community has not been in favor of the bill so its passing could be trigger a negative reaction of some sort in equity prices. I do not know how serious of a reaction there will be (maybe very little) but whatever the market does we have been through this before.
The health care bill is a big bad scary event that has created uncertainty. Well this has happened more times than most people can remember (do you remember the fear triggered by CEO having to sign off on their earnings back in 2002?) and will happen many more times in the future.
Based on past experience we can expect the market to this new news, digest it for some period of time and then revert to worrying (or not worrying as the case may be) everything else it has been worrying about. If the reaction is a fast decline, well fast declines often retrace quite quickly.
Of course there could be more of a meaningful impact on certain types of health care stocks. I've never held a hospital stock or a health insurance stock for clients and I think these areas would feel it most. Ultimately how and how much these companies are paid could be changed as could how we buy pills I suppose but if you need a pill you are still going to buy it one way or another.
Saturday, March 20, 2010
At first, no one thought Arlo had a chance. Sure, he had a wonderful face with a smile that beamed out across the room. And sure, his goofy, affectionate manners won over just about everybody who crossed his path. But the one-year-old Aussie mix had come into Yavapai Humane Society in Northern Arizona with one very big strike against him. Arlo had severe, debilitating mange.
His skin was a complete mess, with tufts of hair falling off his body in some places and altogether missing in others. A layer of red, swollen skin was visible underneath the worst patches. Arlo's mange was so bad, in fact, that the shelter keepers at Yavapai Humane Society knew they wouldn't be able to cover the cost of the medical treatment he needed.
There were only three comments on the post and all three were skeptical about retail investors having collectively wised up.
I tend to discount the notion of a rigged game where firms collude to steal from mom and pops or the idea that the little guy can't beat the house. I would replace collude to steal with "create ill conceived products that frequently go bad with not enough regard for the end user; be they individual investors or institutional investors." I can recall big derivatives blow ups for Proctor & Gamble, Gibson Greetings and Orange County in the early to mid 1990s. There is incentive to push product to get paid but far more often than not the products although wildly mediocre don't hurt investors.
Don't get me wrong to the extent the above paragraph is correct it is a hideous business model that lacks proper due regard but it is not perpetual collusion to steal. I would concede that there have been instances where collude to steal has been close to right like maybe what Henry Blodget apparently did during the tech bubble.
Even if you disagree with me completely think about the tech bubble and the financial crisis. Each event gave plenty of warning--the same warnings actually. The "bad sector" grew to exceed 20% of the S&P 500, the yield curve inverted, the market rolled over for a period of a few months before going below its 200 DMA. This blog did not exist during the tech wreck but I wrote about these things so frequently as they were happening during the earlier stages of the financial crisis that there were complaints about repetitive posts not to mention the comments which said I was wrong for whatever reason.
Whether you manage for clients or you are your own client every end user is participating because they need money for something in the future--probably retirement. That starts with saving money and then investing the money in such a way as to offer a chance for growth combined with being able to sleep.
Assuming you are not saving $10,000 per month while living off of $5000 per month then some portion of your savings is going to be allocated to risk assets. You can keep it simple with things (stocks and funds) that can be sold easily to heed the warnings mentioned above or you can buy a bunch of "sophisticated" products only offered to wealthy.
To repeat a point made recently, the typical person does not need to beat anything or compete with anybody they need enough money when they need it, that's all. I have been a big fan of Australia, among several countries, as an investment destination. If picking Australia turns out to be correct over the next ten years then I would expect it will go up most of the time and have at least a couple of downturns. Anyone agreeing could buy the iShares Australia (EWA), which I own, and if worried about the occasional downturn they could do something like only own it when it is above its 200 DMA. That strategy could turn out to be successful over the next ten years but who would you have beaten? Who would you have been competing against? Even if you could somehow answer those questions what would it matter?
As a money manager I believe my task is to give clients the best chance possible of having enough when they need it and making that ride as smooth as possible to minimize the chance of their panicking at some inopportune moment. I think the best way to get there is with simple products that allow for the occasional tactical decision.
This can exist even if you agree completely with Smith's article and think I am completely wrong about collude to steal.
Friday, March 19, 2010
It is days like yesterday why so many people love the tournament so much, wow.
As I've mentioned a couple of times I will be giving a presentation at the Vancouver MoneyShow on April 7 about portfolio construction with ETFs. I've done this a couple of other times updating with new funds as they come out. The point is not run out and implement the portfolio but more like think about the access that ETFs offer and the flexibility they allow in building a portfolio.
In the presentation I go sector by sector and talk about each fund I use, for most sectors I include 2-4 ETFs. The financial sector is very difficult to construct. The way I look at the world I want no part of the financials in the US, Europe, Japan and China so it makes the task difficult. In client accounts we own banks from Chile, Australia and Canada. The weightings of financials in those respective iShares country funds are 9%, 44% and 34% so using them as proxies for financials is iffy except for maybe the Australia fund. The banks in Singapore are in pretty good shape so iShares Singapore (EWS), 49% financials, could be a proxy as well. The iShares Chile (ECH) and iShares Australia (EWA) are both in my ownership universe.
Other possibilities could include the GlobalX Colombia ETF (GXG) which is 46% financials, Market Vectors Poland (PLND) 38% and Market Vectors Egypt 42%. There are a couple of other one like these but you get the idea. I'm not going to front run the presentation but as handy as ETFs are there are gaps. The obvious way to fill this particular gap, the way I have framed it, is with individual stocks. The is issue here is that there are a bunch of financials I don't want to own and only a few that I do. It is very unlikely that an ETF provider will be create the Commodity Based Economy, Oh & Singapore Too Financial Sector ETF.
Enjoy today's games!
Thursday, March 18, 2010
My opening comment for the panel;
Generally I am not a believer in taking on a lot volatility and risk in the fixed income portion of a client’s portfolio. Quite simply if we, generically, are in a 5% world and you buy something yielding 10% you are taking risk. You either understand the risk or you don’t - but you are taking it. Obviously there is not always a negative consequence for taking risk, but that does not mean you are not taking it.
Unfortunately, we are now in a 0% or 1% world, which is a source of frustration for people of course, but if you are getting 5% in a 0% world you are taking risk.
The way we are positioned for most clients, fixed income wise, is three domestic, high quality corporate issues maturing in 2-3 years, short term sovereign debt from Norway, Australia and Denmark, Vanguard Ginnie Mae (VFIIX), one or two bank preferreds, MFS Intermediate Trust (MIN) - this is a closed end fund and varying level of TIPS exposure depending on the income need and age of the client.
I believe this allows us to avoid being overly exposed to normal risks and if things look like they are headed to yet another 100 year flood, we could cut back quite quickly.
Owning dividend paying stocks makes sense, but too much of anything becomes a bad idea. If all you own are big dividend payers then you will not have a diversified portfolio. A diversified equity portfolio means owning stocks with varying characteristics.
A few days ago I sold the PowerShares Agriculture ETF (DBA). I first bought it ages ago in the mid to high $20s sold a little (not enough as it turned out) in the low $40s and sold the rest last week with a $24 handle. The fund changed its makeup to take in more commodities as a way to address position limits and ever since then the fund has not done much but seemingly eroded very slowly.
Part of the problem might have been low correlation between the components being a drag on the fund but also some of the components aside from being in downtrends were also in a contango. For now no soft commodity exposure but we do have the MOO ETF which owns stocks. Given what might be the new dynamics of the holdings it might be that the single commodity ETNs or narrower ETNs from iPath could be the better way to go in terms of accessing the asset class.
Barry Ritholtz posted this video about five keys to happiness. Two things stuck out to me above the others. One was about exercising. Per the video the various chemicals released from exercising act like anti-depressants and also being fit makes for healthier aging. Dr. Oz, not sure why, put in a quick appearance on CNBC a week or two ago and made an interesting comment. he said that if your waist measures more than half your height you have a problem. I've never heard it put that way before, hopefully you make exercise a priority.
The other nugget from the video was about simplicity. This is a good one and it relates to portfolio management and cycle navigation. What constitutes "simple" is in the eye of the beholder. One way I think of simple, kind of parroting Peter Lynch, is being able to explain why I hold something in a sentence or two to a friend who is not active in the markets and the friend follows the logic.
From the panel yesterday I was down on various types of products (annuities and currency CDs) that I think make things more complicated especially at times where no one wants more complicated. In the panel discussion we broached covered calls and while the strategy has its pluses and minuses it is not simple. I was able to see some of the question from people watching (is that the right word?) the panel live and quite a few of them went beyond simple strategies. Complex, especially where enhancing or chasing yield is concerned, often ends badly.
To clear one thing up, I said that people might have to consider ratcheting down the withdrawal rate to 3% from the normal 4%. One reader left a comment agreeing with my change of mind. I would not say I have changed my mind but in general people need to put everything on the table. One common point I make here is about something having to give. For some people that will mean withdrawal rates.
On a more positive note the NCAA tourney starts in a couple of hours--March is my favorite month of the year.
Wednesday, March 17, 2010
One quote in particular strikes me, it came from the character George Hearst (the picture is of a different character) while talking to Sheriff Bullock. Hearst said "I am having a conversation you cannot hear."
Over the years I have had a few encounters that were investment related that tie in to the quote. When I was working at Schwab there was one fellow there that I came into contact with occasionally (talking late 1990s) named George. George was 71 at the time and this was his post retirement career after having been at General Electric (GE). He was at GE forever and was not bashful about the fact that essentially all of his money was in the stock.
He loved the company, loved the stock and there was no talking to him about the concentration risk he was taking. The stock peaked in September 2000 at almost $60. It closed yesterday at $17.69. I have no idea whether George ever reduced his position or not. Obviously he was not wiped about and while he collected dividends most of the way through (even though the dividend was cut meaningfully) he has a much smaller nest egg than he did ten years ago.
Concentration risk is something he could easily understand but he could not hear it as it pertained to General Electric.
As another example about two and a half years ago one of the guys I fight fires with engaged me in a conversation about real estate. He said you can't lose on real estate with such conviction that knowing him as I do it would have been useless to tell him otherwise.
How many people would not have heard warnings about Fannie Mae and Freddie Mac ten years ago? What about Wachovia, Lehman, WaMu and Bear Stearns? From past periods what about Polaroid? Is Eastman Kodak on its way out? That was a Dow stock for years. Much of the old steel industry in the US is gone.
At various points in history the failure of these companies was simply not possible. I imagine people might have felt the same about Standard Rope & Twine (this was a real company, it was a Dow stock) back in its day.
Any outcome is possible. A given company failing may not be probable but it is possible that any company can fail. Any country can end up not working out despite what we may think. Going back to China from yesterday's post, there is no convincing me that it doesn't work out in the long run but it may not. I sold a position last week targeted at a 2% weight and I could see targeting as much as 5% for the portfolio but that I can go to almost zero hopefully is a sign that I can hear the conversation.
Using moderate weightings mitigates the consequence for conversations you cannot hear. As portfolio management is a series of correct and incorrect decisions, I have said many times putting 3% into a stock that ends up going to zero is not a portfolio deathblow it is merely a bad day. I believe the worst performer I've ever put into client accounts was Macquarie Infrastructure (MIC). For most clients who owned it it was targeted at a 2% weight. I under estimated the impact of it being so transaction oriented and thus reliant on capital markets to function. Despite it being (probably) the worst holding ever I have no recollection of a client even asking about it.
Whether you manage your own portfolio or manage money for others there is no avoiding bad holdings--from time to time you will be wrong. Being wrong is not the thing, the thing is the consequence for being wrong. A 2-3% holding blowing up is not a big deal but at some point a holding becomes large enough that it is a big deal.
If you have a chance, I will be participating in a panel at Seeking Alpha at 2pm EDT about retirement investing. Hope you can check it out.
Tuesday, March 16, 2010
As an FYI I will be participating in the above linked panel at Seeking Alpha tomorrow at 2pm EDT. The other panelists are David Merkel and John Lounsbury.
Hopefully I can add a little to the discussion as the third wheel.
Last week I disclosed selling China Mobile (CHL) leaving us with about 0.65% via themed ETFs. I don't plan to be away as long as I was starting in Q2 2007 but for now the ETF exposure is it.
The chart makes a critical point about what to expect when investing in a country or theme. Whether you are on board with long term merits of investing in China or favor some other country or theme it will not always be right for the shorter term.
China is no less valid today than it was on January 1st. All of the various risk factors that are written about today have been around for months. Really big, long term concepts don't change week to week very often if ever.
Obviously I think occasional tactical tweaks are appropriate but for anyone not comfortable with that sort of thing it is important to realize that the fundamentals of a big macro theme are not washed away because that theme lags other markets for a while.
From 30,000 feet if you own China you believe it will become increasingly more important in the global economy and you expect that to be a tailwind for stocks. That type of thesis could easily be a ten year concept and in any lengthy period of time even the right theme will have periods where it struggles. If you take the time to look at the countries I write most about like Brazil, Norway, Chile, Australia and so on you will see that most of them clocked the S&P 500 in the last decade but there were plenty of short time periods where the lagged meaningfully.
What I think happens, in the context of people not wanting to make tactical trades around a theme, is that people second guess themselves when a theme they favor does struggle for a bit. After two or three months of lagging it is easy to think something is wrong with the analysis, you lose patience and pull the trigger.
I think back to that nugget from Montier from last week about the long term being a huge advantage that investors have over traders.
Not to contradict myself too much but it has to be said, occasionally though we all will end up being wrong about a theme or country at some point or we may be right but then a theme plays itself out and no longer is a hold. So investing is not easy apparently and it comes down to how well you understand the theme in question. No matter how well you understand something you can always understand it better and through ongoing monitoring you can hopefully have a sense for when something really has changed and when it is just a market thing.
On a very positive note Versus is back on Directv which means I will not have to go to a neighbor's house everyday in the month of July.
Monday, March 15, 2010
The big macro is that many states are in a lot of trouble. Per the Barron's article, called The $2 Trillion Hole, 46 states have underfunded pensions although I should note that a few of the states are only off by a slight amount. You probably also know that 48 states (South Dakota and Montana the two exceptions the last time I looked) have budget deficits.
If employment does not improve then the states will collect less in the way of income tax, if home prices continue to go down then the states will collect less in the way of property tax and if all of this impedes consumer spending (not an unreasonable conclusion) then states will collect less in the way of sales tax. This all serves to seriously threaten the revenue structures of the states.
Then layer on the pension issues and consider that weaker states have to pay more to borrow which only worsens the situation. Regardless of how you think this part of the story will work out it is clearly a mess right now. About a year ago I mentioned getting out of California munis for any client who had them. A couple of readers left comments sort of disagreeing, in the belief that one way or another things would be ok. I don't buy much in the way of munis but some folks had them from before we managed the accounts.
You may know from past posts I am not a big fan of taking risk in the fixed income portion of the portfolio and to the extent we take a little risk, taking risk in treasuries or munis is absolutely not the trade we want to make. I don't want to be the one that has to figure out how this works out with client money on the line. There are plenty of quality corporates that are at very low risk of failing and quite a few foreign sovereigns at very low risk of failing; lower risk than the states anyway. With all the stats about the trouble the states are in if a state does fail how would you, as an advisor explain, to a client why you owned the paper? If they do fail then everyone will say how obvious it was that they were going to fail. I think it makes sense for advisors and do-it-yourselfers to just avoid the space altogether.
If you have to be in the municipal space then maybe the Market Vectors Pre-Refunded ETF (PRB) could be a buy but to be clear we do not own it.
As the Marketwatch article alluded to, investors are seeking yield and so might be willing to take more risk. This may be true but short term relatively safe paper has a yield in the ones; we are in a 1% world. If you buy a 4% yield you are taking risk and I am quite certain that there are many people, including advisors, who do not fully understand the risk that they are taking.
On a different note I am thrilled that the NCAA Tourney is about to start. The 64/65 game in on ESPN tomorrow at 7:30 east/4:30 west. I will say however that I really dislike all references to the event that contain any form of the word dance. And is it me or is Clark Kellogg awful?
Sunday, March 14, 2010
The article was written by Thomas Kee Jr. from Stock Traders Daily. The indicator is called the Investment Rate and it measures demand for asset classes based on demographic trends. As a very simplistic example baby boomers pulling back from equities as they get older indicates a headwind for equities because that investment demand is going away.
The big macro of this is easy to follow and I think the concept makes sense. I write about investment demand often but a little more micro than what Kee is focusing on.
As you look at the back test of this it is obviously remarkable and in the time he has done this in real time, since the start of the last bull market, it creates a bit of an uh-oh just like the Super Cycle chart. The article does not spell out how he was able to compile data from 100 years ago and similar to yesterday's post it would be reasonable to question whether demand for equities in 1912 offers any insight into what demand for equities will be in 2012. I have to think that the equity market participation rate back then was a microscopic fraction of what it has been in the last, what, 20 years or maybe 30 years.
I don't know of course it just seems like the obvious question. Question asked the idea of baby boomers thinking they need less equity exposure seems like it will obviously be a headwind. Jeremy Siegel has said many times that investment demand lost from baby boomers will be made up by a new class of emerging market investors who want to own the best companies in the world (paraphrase). I've heard Siegel make this argument several times and it makes no intuitive sense to me whatsoever.
That the US has a demographic problem is not new and is not really disputed that I am aware of but the US is not alone in this. Japan might have a bigger problem than the US, China has a problem that some feel could start to manifest itself as soon as 2015 and big Western European countries that I think are such lousy investment destinations all have demographic problems of varying magnitudes and timelines.
Countries with young average ages is a positive attribute for an investment destination and of course a trait we often see in emerging markets. In just about every article for theStreet that I write about an emerging market something-or-other I mention the average age listed as one of the positives (in the instances where that is the case of course).
A reader commented on yesterday's post asking what I was going to do if equity returns will be this bad for a while longer. Well I've been doing it (and writing about it for years). One theme of this blog from the start (with no claim of originality) has been that the US is slowly, or quickly depending on your view, becoming a less attractive investment destination. I've slowly been increasing client exposure to foreign equities as a big long term macro.
The popularity of home bias as a blogging topic ebbs and flows but just as success in the last decade hindered on owning the right countries (along with a couple of big sector calls) so too will that be the case in the new decade. It is very unlikely that the right countries are the ones that dominate the EAFE Index. If you've been following this thread with me for a while I think all of these things have been quite obvious as long lasting headwinds for the US. This not to say that I was right about the magnitude of any of this because I wasn't but the US as less attractive has been obvious.
Saturday, March 13, 2010
The real return component is called the Reversion To The Extreme Supercycle Oscillator. The fist observation one might make is uh-oh. I imagine the big thing should be the consistency in where the market has reverted to in the bottom of the channel and the very long period of time that these cycles encompass.
While there is some variation in where past cycles bottom out the chart obviously implies several more years of stock market malaise. The fundamental condition of the US economy, balance sheet, housing market, underfunded liabilities, employment situation and so on certainly creates visibility for a poor result for several more years.
I have no idea whether the current "reversion" will last as long as is implied by the chart and it is reasonable to question the utility of extrapolating from 1920 but as a supporting nugget to the more important current events it provides perspective for how long cycles can potentially last and how big some of the counter-trend rallies have been.
You can do with this what you want but not surprisingly I view this as yet another argument for learning about foreign markets and investing in them selectively.
David Kotok had what I will call a peculiar moment Friday morning on CNBC. He always says that his firm only uses ETFs in client accounts. The segment was titled Consumer Headwinds (based on the graphic on the screen anyway) and along the way Kotok disclosed being overweight discretionary ETFs and that they use two funds; the iShares DJ US Consumer Services Fund (IYC) and the Vanguard Consumer Discretionary ETF (VCR). So far so good I suppose, overweighting discretionary is either right or its wrong--not sure why they use two funds but ok.
Then he said "Melissa (Lee) pointed out to me earlier that one of them (the ETFs) has been lagging because Walmart is a heavy weight and has been dragging it down." Melissa then explained the point a little more and asked the reasonable question of whether, based on Walmart, the ETF will be "dead money." Kotok went on to sort of defend the ETF as being a way in for people who not pick stocks which he reiterated that they do not.
IYC is the ETF with Walmart, it has 8% and if VCR has any Walmart it is not in the top ten (I am quite certain there is not WMT in VCR given that it is cap weighted but I did not look at all the holdings). As far as IYC lagging VCR because of Walmart it was not clear what the time frame was in the conversation but YTD IYC is trailing by about 2% and for the trailing 12 months the lag for IYC was about 25%.
What was peculiar to me was that Kotok seemed to not know that IYC was heavy in Walmart. I believe he is the CIO of the firm and depending on how big they are the situation could be such where he says overweight discretionary stocks and then portfolio managers come back after the fact and tell him that this is how they did it. This sort of scenario is very easy to imagine.
The important thing is the point made by Melissa. As obvious as it should be it is vital to understand what is under the hood of any investment product. If you think iShares DJ US Telecom is the best way to own the sector you should probably know a thing or two about AT&T which has a 16.43% weighting in the fund.
As a quick reiteration of an old point it is unclear to me why any investment professional (and do-it-yourselfer for that matter) would limit themselves to only one type of product. Favoring something is easy to argue for but as useful as ETFs are there are of course gaps in what is available.
With some ETF segments all the choices could be bad. I have to think that for a while there every financial sector ETF was a bad choice. During the worst of it I was pretty open about the type of banks I owned--there were places that offered relative outperformance which is important for people not wanting to completely zero out a sector (this is true of many advisors). I have to think that if I found these things they were not that difficult to find but whether that is true or not, the typical financial sector ETF did not cut it.
If you are familiar with Kotok and have read his stuff you know he is no lightweight so I am not sure why he of all people is ETF-only.
Friday, March 12, 2010
From the top down this does not change the exposure to equities or to the telecom sector but it does mostly eliminate China and increases Israel (we've held Teva (TEVA) for years now). We still have a little China as embedded in some of the ETFs we use.
My history in the position was that I bought it in the low $60s a year and a half ago. I sold out of Sinopec (SNP) in mid 2007 thinking a big decline was very possible. I thought China could cut in half fundamentally and then overshoot another 10%. My sale of SNP was early and my purchase of CHL was early as the China market ended up with a 70% decline before bottoming. CHL seemed to drop almost immediately after I bought it then leveled out for a while, puked down when markets were panicking came back a lot and has been in the high $40s for a long time, with a couple of exceptions.
From the bottom up I can't complain about the stats or the subscriber growth but the stock has not served its purpose as a proxy for China in the manner I had hoped for. From the top down China has become a little riskier in the last few months given the myriad of issues involving over heating and over capacity. I'm not sure from here that investors have to own a company with half a billion customers out of 1.3 billion or so in the total population--the growth seems like it could slow down. As a note the number of subscribers when I first bough the stock was about 100 million lower. I'd call that good growth but the market seemed not to care.
I don't expect to stay out of China very long at all. For all the issues that exist, all the bubble talk and so on that market is down 50% from its high. I think that a resource based or industrial based stock or ETF might serve as a better proxy but I am still mulling.
On a related note a reader asked why I don't talk much about REITs. I sold my last REIT about three years ago. Essentially I have given up on them as being diversifiers. I got lucky with the timing of that sale but as things unfolded they generally seemed to look just like financial stocks.
REITs were long heralded as offering diversification. Well when investors needed that the most REITs failed. You can reasonably argue that all correlations went to one during the meltdown but that is not exactly right. Several of the countries I own peaked months after the US did and gold went up throughout. Obviously broad based inverse funds went up as well.
Looking forward I think real estate is so fouled up in terms of prices and even rents that any recovery can happen without me or our clients. One the reasons I've written so much about farmland stocks has been to explore whether or not they could fill the role the REITs were supposed to. While I think they can be valid holdings I am not so sure that they would zig a whole lot the next time global markets fall in unison.
Thursday, March 11, 2010
We have had our place here since 1998 and my wife had been coming up here before that since 1982 when her parents bought a cabin up here which they still own. In all that time there has not been this much snow in the month of March. Two years ago we had snow over Memorial Day weekend so we get plenty of snow but not this much this late (this is not a global warming post).
After the snow falls I shovel it. We park one vehicle up top and leave one at the bottom of the driveway. So shoveling consists of shoveling off the deck, then the small pen, then the path to the driveway, then I walk up to the top of the driveway to shovel out the car up top, then I work my way down our driveway typically making a two shovel-wide path for each tire so that whatever is parked below can get drive out without slipping. By getting on this at the right time of day the temperature usually allows the shoveled spots to melt completely.
Now we are not supposed to get this much snow in March but regardless of when it snows the shoveling has to be done so that we can come and go safely and easily and so the smaller dogs can move around.
The point is to make a comparison to saving money. You have probably seen this article from CNNMoney which cites a study that says 43% have less than $10,000 saved. 43% of whom you may ask and according to the article they surveyed 1153 people as young as 25. The article did not say how many of the people were younger than 30 so while I'm not sure the 43% is useful we all know that people do not save enough money.
Clearly saving money is not easy and the generally deteriorated financial condition of the last couple of years makes saving money even more difficult but saving money must be done in order to have a chance of of having a financially secure future.
Like shoveling snow, saving is difficult but has to be done. I imagine that the typical person reading this blog knows this and does save some money every month but if you read the CNN link above it seems pretty clear that most people do not save in a meaningful way. Maybe this would motivate you to try to spread the word but if not you can at least take responsibility for your own proper saving and avoid the future hassle and worry that so many folks appear to be headed towards.
A quick comment on the snow shoveling; it is a fantastic workout. At some point in the future I'll need to put a blade on the front of an ATV or pickup truck but not yet.
Wednesday, March 10, 2010
First up was that while he does a lot of reading he said most of what he reads is more about studying human behavior the specific market information. I would characterize this in part as benefiting from other people's mistakes. While this is useful I might fine tune it some to each person needing understand what they are vulnerable to. There are plenty of fallacies and other types unproductive behaviors that impede investment success and no one has all of them. This requires introspection.
He also talked about information overload. This contrasts nicely with the quote yesterday from Jim Rogers who believes in watching everything. I probably fall closer to Rogers but what I would add is that I like to read people that I know I will disagree with.
Coincidentally I exchanged emails with a buddy who asked me what I thought of a particular blogger. The blogger in question does a great job with isolating relevant issues and then asking the right questions but he often answers those questions incorrectly or does not seem to read the data correctly with some of his opinions. He is not always wrong obviously and not wrong even half the time but even though he is obviously wrong some portion of the time there is value in the issues he isolates so I read him. The need to sort out and even dismiss is handy skill to have in trying to study markets.
Montier said people focus too much on the outcome not the process in a sort of live in the moment comment. But then a few sentences later he said;
It appears as if investors have a chronic case of attention deficit hyperactivity disorder. The average holding period for a stock on the New York Stock Exchange is just 6 months! This has nothing to do with investment, and everything to do with speculation. Having a longer time horizon than these speculators appears to be one of the most enduring edges an investor can possess.
In a way each sentiment could be saying two different things. I would tie them together by noting that there is no single process that can be the best every day, quarter or year. Hopefully whatever your process is you have reason to believe it gives you a chance to get the job done in the long term, whatever that means to you. Focusing on process could mean not losing faith in a reasonable method during one of those periods where that method is not the best.
The idea of a longer time horizon being an enduring edge is similar to Hussman's thinking in terms of measuring the result over an entire stock market cycle which has been a big influence on me. I know plenty of people view portfolio construction and cycle navigation differently than how I do but the task is much easier when you embrace the fact that big declines happen every so often, you will not "outperform" the market every year and a simple yet reliable defensive trigger point for defense can go a long way to enduring through with less emotion and less emotion should result in fewer mistakes.
One last item was a quote that Montier cited from Paul Samuelson “Investing should be dull, like watching paint dry or grass grow.” Personally I find the work exciting and interesting but I do spend a lot of time trying to make the portfolio dull.
Tuesday, March 09, 2010
Interviewer Damien Hoffman asked Jim what countries he watches to make sure the Greece situation doesn't get out of control. Jim gave an answer that was broader than the intent of the question in saying...
I’m trying to watch the whole world. We cannot be very successful investors if we don’t know what’s going on everywhere. All of a sudden you’ll something like Iceland will show up and you’ll get killed because you didn’t know that Iceland even existed.
He went on to note that often events start in places no one pays attention to. If you have been reading this site for a while you know that I try to 'watch the whole world' and write about that some. In the past I've mentioned some countries that are off the beaten path and obviously I devote a fair bit of time on trying to learn about certain narrow market segments where I think value can be added either through performance or dampening volatility.
The potential portfolio benefit should be obvious. As one example the troubles in Latvia caught my eye early on (read about it either in the FT or in Jyske Bank's research) and it became clear that Swedish banks were very heavily exposed to Latvia through loans made into the country. Part of Latvia's trouble came from unrealistically trying to maintain a peg to the euro. But now it is possible that they pulled off an internal devaluation (A Fistful of Euros has had a post or two about this) but that remains to be seen.
Every holding in a portfolio is risks but often those risks are not obvious without casting a wider net in what you study. The Latvia story might have steered you away from the the risks in Swedish banks.
Speaking of casting a wider net John Hussman had some interesting comments this week on the extent to which you can count on investor myopia resulting in behavior that is ultimately self destructive. He notes "it is impossible to ignore the rise over that same period of widely-viewed financial programming that is equally riddled with cartoonish content that encourages short-term thinking and speculation" all but mentioning Jim Cramer by name.
I don't watch Cramer or Fast Money (the afternoon version but I often see the 15 minute version during Power Lunch) but I can see where the shows might influence people to trade more frequently than is right for them. During that halftime report they go around the panel and call the close. I don't know but I have to think that the people who would be inclined to speculate on what the stock market might do in the last couple of hours in its day have no interest in what the Fast Money people think will happen. I also doubt that too many people really need to buy puts if the stock goes down another $0.50.
I also wonder how many people "have" to trade a stock ahead of the earnings, based on the earnings or based on the conference call. There is nothing wrong with this sort of trading on its face but there are not too many individual for whom this sort of thing is suitable. There are plenty of people engaged in exactly this type of thing who do not realize it is unsuitable for them and that is a problem in the making.
Another form of myopia; I guarantee that stock Medivation (MDVN) that dropped from $40 down into the teens on bad news from the FDA wiped out some person somewhere who owned only that name fully margined. In a less dramatic example, the next time emerging market stocks or commodity stocks go down a whole bunch there will be people that learn the hard way they had way too much exposure compared to what they should have had.
His point, I think, is that people do not learn from the mistakes they make. Everyone makes mistakes, you don't stop making mistakes but the repeating of the same mistakes hinders reaching the long term goal. Despite how obvious this should be, trust me when I tell you many folks lack the introspection to see this.
Monday, March 08, 2010
Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits. They were "underwater" by $800,000, right? Wrong: Estimated loss, $51 million. That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.
Karl goes on to list several more specific banks and asks the reasonable question that if so many small bank are doing this what about the biggest banks like Citi (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC)? He notes that the combined assets of the four are $7.49 trillion (can't vouch for that but I take his word). Using the same percentage of overstatement he says the total overstatement of the biggest four could be between $1.49 trillion and $2.99 trillion.
It is not clear to me that assuming an overstatement in a percentage similar to other banks is valid but the question of whether they are overstating assets by some amount is valid. I am not making a Kudlow-type argument saying that projecting other banks overstatement is invalid because for all I know the big four could be overstating by more but to be clear I don't know and that is the point.
When I first started this site in 2004 I was underweight financials because their weight in the S&P 500 was around 20% which I took as a warning of potential underperformance not Armageddon. At that point I owned a bunch of foreign banks including two European banks and one domestic bank which was BAC. Then in early 2006 the yield curve inverted which is a warning for the economy but also specifically for financials because it makes lending less profitable but this again did not point to Armageddon. At this point in the portfolio financial stocks had drifted to a slightly smaller weight due to the performance of other things.
Then in mid to late 2007 after reading for weeks and weeks why European banks might be worse off than US banks I sold the two European banks (Allied Irish Bank and the couple of months later Barclays, I bought a Chilean bank with the Barclays proceeds). I disclosed selling BAC immediately after announcing the Merrill Lynch acquisition. In the aftermath of stock market event I started rebuilding financial exposure but avoided increasing bank exposure (I added a publicly traded exchange and an index provider).
Part of my ongoing apprehension with domestic financials, so at this point we own no US banks, is it is not logical to me that there won't be more shoes to drop for US financials. Denninger may have isolated a big shoe or not but I do not think it is necessary to know where the next financial sector problem will be or what the magnitude might be.
I realize this is a repeat theme but if this (the entirety of the entire financial crisis) was anywhere near as big as we were lead to believe then isn't it only logical that it will take a long time before we understand the totality of it all? Yet I guarantee there will be very smart people who are not allowing for the possibility of more fallout and will get caught positioned the wrong way yet again.