February 29 Take Two

If all went well we left New Zealand last night we flew to the Cook Islands where we will be until this weekend when we return to Arizona. New Zealand and the Cook Islands are 23 hours apart on the clock but as a practical matter are only one hour apart. We spent the entire day of February 29 in Auckland before taking off around 7:30 pm. We landed a little after midnight in Rarotonga on February 29 thus having the day again--of course we lost a day coming over here but it is just an odd thing of how the world works.

Anyhoo, the housing market still stinks. The latest Case Shiller numbers showed prices "3.8% in December from a month earlier and dropped 4% year-over-year." With things like this I am not necessarily the one to make the case for why things will get better or worse so much as trying to understand the macro picture, take in both arguments and decide which way to lean in the portfolio.

This describes an active decision based on an assessment of current events so as should always be mentioned; an active portfolio is a series of decisions of which some will be correct and some incorrect. The portfolio doesn't need every decision to be correct in order to succeed. No one can be right with every decision.

I do share my assessment (this is different than trying to make an economic argument) on these sorts of things and my assessment has been the same for a long time which is that this was the worst financial crisis in 80 (so they tell us) and so it will take many years to fix. The Great Depression left scars for decades and it seems plausible that the recent crisis could do the same.

The reason to bring this up is as a reminder. Certain economic data points have improved over the last few months and the S&P 500 seems pretty intent on going to at least 1400 but the economy is unlikely to be truly healthy without a healthy housing market and healthy jobs market.

One final personal note on our New Zealand trip. Among other things we did, we stopped at just about every fire station along the way (much to Joellyn's dismay) to take pictures and hopefully swap blue shirts. I struck out the entire trip as the departments in the countryside are all volunteer. Finally I had success at the Auckland Central Fire Station on Pitt St. and got probably the neatest shirt I've ever traded for (I think I have about 8 in my collection). Thanks to Scott at the station for making the trade.

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International Living?

A reader asks;

Do you ever return from an international trip wishing you lived in another country besides the United States?

This question has come up several times over the years on this blog, various magazines, MSM websites and there are websites devoted entirely to this subject. Doesn't everyone watch House Hunters International and wonder what if for at least a minute or two?

Living in another country is intellectually appealing to many people on some level. In many instances it is cheaper than living in the US which makes financial plans go a lot further. A $5000 monthly lifestyle in the US might only take $3000 or $3500 in a well chosen foreign destination. Additionally many countries offer very attractive tax benefits or other forms of lifestyle discounts that make it much cheaper to get on.

The dollar size for a portfolio can obviously be much smaller when the income need is $3000 per month versus $5000.

There are of course drawbacks that relate to family and medical care among others. For people who need to spend a lot of time with family (not a knock, some people do) it would be easy to envision any savings living abroad being soaked up by traveling back to the US. This doesn't have to be bad but would seem to nullify one advantage.

Another potential drawback is medical care. If you do some research you will find plenty to tell you that medical care in some country is just as good as the US but I could see this being a situation where you may not really find out until something comes up. I also realize this could be some sort of bias of mine. Obviously it doesn't matter how well a medical system works if it doesn't work for you when you need it.

I tend to view this as a very individual type of life choice so my trying to make a case either way seems silly. I do think that something this big needs to be very well planned out. There does not need to be a panicked or overly impulsive call to action. Being in New Zealand, which would be relatively easy to move to, there are plenty of things that would take some adjustment besides the driving. There are serious differences at the grocery store, on television (although I caught the end of an NHL game last night before dinner) and I have heard two completely different accountings of the medical care here.

If someone is looking to move to reduce their expenses because they have to, I could see that having unexpected and unresearched consequences and undoing such a move could have devastating costs. Success with such a move would have to include several trips to the destination. I know some recommend "living" in a place for six months to make sure it is the right fit.

If the reader really cares about what I would do; no I have no plans to live elsewhere. Visiting places and wishing you had more time to stay seems like a better psychology toward these things--at least for us.

We are in Auckland until tomorrow. The one picture is down on the water and seemed interesting and the other is of the neatest espresso machine we've ever seen. I mentioned the other day the extent to which the coffee culture is flourished since we last came here in 2005, well all the more so in Auckland. We staying downtown, one block off of Queen Street and there are dozens of coffee houses. My favorite from last time is still here; the Vulcan.
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ZQN to AKL

We are leaving Queenstown on Tuesday (NZ time) and headed to Auckland. We drove our RV, they're called campervans here, through gold mining country, up to Greymouth, over to Christchurch, to Mount Cook, to Te Anau, then to Milford Sound and finally back to Queenstown where we hiked up above the city for some pretty good pictures and a very steep climb.

The RV was very handy but also challenging. We slept very well in it, never needed to use the restroom or kitchen because the Holiday Parks have every conceivable thing you would need without having to utilize the RV other than to sleep. I may not have thought this before the trip but get the GPS, it is worth paying up. Ours was included in some package that we bought which was a great lesson on the utility on a trip like this.

Regular blogging should resume tomorrow. Thanks for indulging me on this trip. Obviously when we take trips like this, work needs to continue and that includes blogging.
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Sunday Morning Coffee

The Barron's interview was with Jeremy Grantham and had some great nuggets--I then add a little to his comments.

Long-term returns of the U.S. market, if you take out dividends, is 1.8% real. If the market ticked along at 1.8%, which is its fair value, no one would make any money. Goldman Sachs would be a quarter as big as it is. Big investment firms love big, hairy bull markets and delicious crashes so they can design and sell more instruments.

The above is a tie in to the theme that Wall Street firms take advantage of the investing public. While this is probably true I don't know if there is a way to quantify it. I take this as a call to avoid expensive broker products, stick to portfolios of individual issues and ETFs and allow yourself to think independently about how to navigate market cycles. There has to be a reason why the usual perma-bulls are permanently bullish so do not buy what they are selling.

This is a business-as-usual overpriced market, and you'll get a zero return for seven years. So you should be able to get the return by going overseas or hiding in U.S. blue chips. If you have a fairly long horizon, like a seven-year horizon, you will do fine, and that's the only thing that matters.

I write a lot about investing over the course of the entire stock market cycle or longer. For most people the real goal is simple having enough when they need it which makes 2012's result meaningless. I clued into this from John Hussman and became a believer based on my experience as a portfolio manager. Long term outperformance compounds to benefit the portfolio and help with the objective of trying to have enough when you need it.

(Timber has) always been my favorite, but it doesn't make any sense unless you can think ahead 10 years or longer.

Another example of the importance of thinking long term even if you have no interest in timber.

The really bad news is that the 2% I thought we would have during the seven lean years is perhaps very close to what the long term will be, even after the seven years are up. It isn't clear to me that the developed world will grow faster than 2%, mainly because of the population, but also because we have caught up with each other.

This is a long term idea about where to allocate capital. While some studies conclude that there is no correlation GDP growth and stock market results, I have said before that the 2000s would seem to refute that conclusion and I also believe it is logical that a country with a better balance sheet and more attractive growth factors would seem to have better chance for stock market success than an over indebted slow grower.

I am aware of the confirmation bias in my gravitating to these points. I have been investing along these lines for a while now (and writing about it) but clearly I was not the first person on any of this. These are what I think of as being obvious long term themes and believe the results offered by these themes continue to justify the exposure.
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The Big Picture for the Week of February 26, 2012

No real post today just a few pics from our visit to Milford Sound on Saturday (NZ time). The first one is our "campervan" waiting to go through the Homer Tunnel. Driving it is going pretty well (knock on wood). It is relatively small, about the same length as a couple of the Walker Fire engines and most importantly is an automatic. Shifting a manual on the "wrong" side would have increased the complexity in dramatic fashion.

Pic number 2 is early on in our three hour cruise out on the sound. Number three is one of the mountains and waterfalls from what I thought was an interesting angle.

As we were headed back in a pod of dolphins swam along with the catamaran we were on. Apparently it is fun for them to get pushed along side. Joellyn took about ten minutes worth of pictures and I think this is the best one with a dolphin out of the water with a mountain in the background. And the last picture was just about at the end and seemed very scenic.


























































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Recession Now Expected in EU

According to this link I found at Seeking Alpha the EU is predicting it will be headed into recession later this year. The eTrade baby would want to show you his shocked face over this one (paraphrase of my tweet about this yesterday.

First, does anyone thing the EU emerged from recession in the first place? I mean really emerged? I would say no but either way I think it is quite obvious that the financial crisis in Europe is alive and well. Countries are falling new desperate action plans are not working and there are serious demographic problems.

Many years ago I read something about Turkey wanting in but that one part of the equation working against them was fear that their large and young population (about 70 million with an average age near 20) would allow them to dominate the EU. There were other issues too but this was the most interesting for how subtle it was. I'm not certain if Turkey still wants in but I wonder if now the EU needs Turkey more than Turkey needs the EU.

One drum I beat regularly is about the worst financial crisis in 80 years taking a long time to sort itself out. Europe will be dealing with the particulars of its crisis for many years as will the US be dealing with its version of the crisis. The US is clearly healthier than Europe but that does not mean all well or that it won't take many years for real estate, as one example and the job market as another, to again get healthy.

I write about this often because I think avoiding or grossly underweighting Europe (and US banks for that matter) will be an easy to add outperformance for some investors and reduce volatility for others.

The first picture is Lake Tekapo and the second one is the best shot we could get of Mount Cook. We spent Thursday night at Mount Cook Village but never got a clear view because of inclement weather.
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Morningstar Gets One Right

Shocking title from me. Morningstar had an article I found on Seeking Alpha extolling the virtue of what it calls boring investing with low volatility ETFs. It believes the best of these is the PowerShares S&P 500 Low Volatility ETF (SPLV)

I've been writing about this for a long time with at least two different phrases; smoothing out the ride and John Serappere's 75/50 concept which targets 75% of the market's upside and 50% of its downside.

Last year was a great year for the low volatility strategy. The market was flat, financials got crushed and since that sector is almost zeroed out in SPLV the fund outperformed SPY by about 11 percentage points in 2011 (note SPLV came out in May so only seven months) which is a significant beat.

This year paints a different picture as financials have been trading well. The Financial Sector SPDR (XLF) is up over 12% YTD, the SPX is up over 8% and SPLV is flat which is a significant lag for less than two months. You can look under the hood for all the sector particulars but as is often the case some of last year's best areas are doing poorly this year and some of last year's stinkers are doing well. If risk is on then the low volatility ETFs should be expected to lag.

The long term evidence on low volatility investing that each of the fund companies provides is very clear about the long term benefit of favoring this space but it should also be clear that in a year that is up a lot, low volatility investors will lag. This is not bad as one year means nothing in pursuit of having enough money when you need it other than to wear on someone's ability to be patient.

No strategy can be the best for all times. The next time the market is up 25% in a year low volatility investing will look lousy and the next time the market is flat or down low volatility investing will look fantastic. As always, long term investors need to be patient investors.

The first picture is from Arthur's Pass from Wednesday NZ time (Tuesday in the US). The second picture is the Whataroa FD fire station. The final picture was a coffee stand on the side of the road as we made our way to Mount Cook. The coffee culture has permeated New Zealand in a way that did not exist when we last visited in 2005. The Mount Cook area is socked in with weather but hopefully we will be able to see it today and get some pictures.


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A Heckler Makes A Good Point

The first comment on the Seeking Alpha version of my Hugh Hendry post asked why anyone should care about my opinion about someone else's opinion with the someone else being Hendry. This was amusing on a couple of levels because why should anyone care about anyone's opinion about anything?

Personally speaking I apparently love to learn new things. This applies to my day job (managing money) and my involvement with our fire department. Learning plays a large role in both--no one knows it all.

The bigger question raised by the heckler is what value is gained by taking in opinions of other people? The answer is different for each of us. Long time readers may recall my belief in taking little bits of process from various sources to create your own process. Three big influences for me have been Jim Stack on defensive action, John Hussman on thinking in terms of cycles and Ken Fisher on the importance of foreign investing. Each of the three do things I don't agree with too.

If I agreed with everything one of them did I would just be copying them which is not necessarily bad but it would not be my own process.

Hendry is interesting as are a lot of people we read about from time to time and so for people who are interested in opinions from people and even opinions of opinions there can be value in attempting to dissect what some like Hendry is saying or value in trying to understand the contra argument for what Hendry is saying so as to better decide what role, if any, Hendry's thought process should play in what you do.

I agree with Hendry about Japan having serious problems, I mentioned this countless times here, but my preference is to simply avoid it.

Wednesday New Zealand time we started going to the Fox Glacier (top picture) and then on to Franz Josef which is another glacier and the second picture. There was a short little hike at each one. We then did a lot of driving through gold country (there are several towns that have gold mining histories including Ross where we had lunch. We stopped for a mocha in Hokitika then kept going to Greymouth where I visited with the fire department for about 20 minutes to try to learn a little about what they do, how they train and what their calls are like and I they gave me their fire patch which is a pretty neat one. We took pictures at several other FDs along the way. They are all "volunteer brigades" but the station in Greymouth is the big one in the region.

We then went through Arthur's Pass to get to Christchurch. This was steep country going up over the pass and it was raining the whole time with some fog but made it just fine. Downtown Christchurch looks wartorn from the quake that was exactly one year ago--we actually had trouble finding a place to stay because so many people came in to commemorate the anniversary.

Today we are headed to Mount Cook.
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A few weeks ago I was having a conversation with the people who serve the ads on this site and they noticed a drop in my traffic. I made the observation that bull markets and other forms of feel good rallies tends to cause page views to drop. This is an observation first made by Barry Ritholtz quite a while back--bear markets are good for blog business.

Whether the current lift is a bull or something else it is clear that that people are generally feeling pretty good so of course at some point there will be too much feeling good and then the market will again put a scare into people. When that happens there will be reaction like this has never happened before.

It is astounding the extent to which people do forget past market pain and then live it for the first time whenever it happens. I've told the story before of a former client (he ended up realizing he could not tolerate stock market volatility) who would call in a panic and how I would remind him that he had been through more of these than I had but of course at the time there was no ability to explore this with him (at least I could not figure out how).

The reason to bring this up is as we sit here today the market is feeling pretty could, it has been lifting for several months and of course there is no way to know how long it will continue and no reason that if it does continue for an extended period that there cannot be a large whoosh in the middle. Remember this now while you are feeling good so there is no panic later.

A reader asked about our trip in NZ. We started in Queenstown on Monday. We rented an RV for the trip and on Tuesday we drove to Fox Glacier, stopping quite a bit on the way to look at the scenery. Some parts are like the Oregon coast and other parts are like the area around Vancouver.

We are on a five day loop that will take us to Christchurch before heading back to Queenstown. When we get back we are then headed over to the Milford Sound and the Fiordlands National Park. I will keep updating as we go.
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Hugh Hendry in Barron's

The Barron's interview was with Hugh Hendry from Eclectica and as it always is with Hugh, it was very interesting even if part of it may have been a conversation I could not hear (paraphrase of one of my favorite quotes from the show Deadwood).

A big focus was on his reasons for buying credit defaults swaps on Japanese companies, mostly Japanese steel companies based on how the article read. Admittedly the entire thesis was tough for me to follow but basically Japanese banks are trying to shake the money tree by selling CDS too cheaply versus what the actual risks are. This is a case of misusing leverage, he believes, and it will blow up spectacularly for the sellers while benefiting the buyers.

A couple of things stuck out as points to try to learn from or challenge his thought process. As far as an implosion in equity prices, the Nikkei is down about 80% in 23 years. That type of multidecade run prices in a lot of doom and that somehow new news could cause that trajectory to slope downward at a steeper angle seems unlikely. It could happen of course but down 80% in 23 years is down 80% in 23 years.

The other point is he thinks the banks selling the CDS are not managing their risks properly. I don't doubt that for a second but if the sellers of CDS are mispricing the risk they are taking then how will they pay out on the contracts when Hugh turns out to be right (giving him the benefit of the doubt)?

He also said he is bullish of some equity exposure and appears to believe in the Malthusian theme of inadequate resources to feed the world.

On a personal note, Joellyn and I are in Queenstown, NZ. We flew here overnight Saturday, landing on Monday morning NZ time. The first picture is out the window of the plane we took from Auckland to Queenstown and the second picture is on our approach to Queenstown. For any clients reading this, work continues as I have my laptop (thrilled the adapter is working properly and it did not blow up) and am in constant contact via email for anything that might come up--this also goes for the fire department too.
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The Big Picture for the Week of February 19, 2012

Fitch Ratings upgraded Iceland's sovereign debt to investment grade which serves as a milestone in the country's journey back from the abyss. The short version of the story is fishing wealth funneled into creating a booming financial industry with a sizable global footprint that then went on to be mismanaged and over-levered with far too much risk, to financial Armageddon and now a recovery. Somewhere in there probably needs to have a mention of as yet unfulfilled potential of geothermal power.

I clued into to Iceland as a possible investment destination a couple of years before it exploded, had some luck trading Kaupthing Bank before it went bust and although the last trade in it was a loss we were out long before zero.

Iceland took a different path, it did not bail out the banks it let them fail and, depending on how you look at it, stiffed foreign depositors in the Icesave program from Landsbanki which you may recall was very controversial. Whether saying no to Icesave participants was right or not, the thought process behind it was a tearing off of the band aid that would enable a faster recovery. I don't recall where I first read the idea of letting banks fail, allowing the share holders and bond holders eat it while protecting the depositors but it resonated with me as being a better path than what was done here.

There would have been consequences of course but I believe we would be able at this point to see when we get out of the wake of the crisis. But with the path taken here I do not believe we do know how we get out of this. Yes the stock market is having a good run and some data points have improved but we are a long way from normal, a very long way.

Back to Iceland, at some point it will become an investable destination again, maybe it is now. I think the fishing industry could be a way to go as part of the Malthusian theme but the accessible publicly traded fisheries are difficult to own, they swing violently from feast to famine. It also seems like a logical long term theme to invest in geothermal but as readers have pointed out the distance makes it very difficult to harness on a global scale and not every company is willing to build there the way Alcan (now owned by Rio Tinto) did.

Investment destinations come in and out of favor on varying cycles and Iceland is no different. I continue to believe in it as a long term idea but we have been out of it for years now and may not ever go back in but it is worth keeping tabs on. This is similar to New Zealand, it has a lot of offer but we have been out for six years. I continue to pay attention and expect to go back in but that remains to be seen.

To the extent you invest at the country level, occasionally you will need to sell a country you otherwise like. This does not mean you should forever turn your back on that country.

The pictures are from our trip to Iceland in 2006.
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Sector Bond Funds

There was a meaningful evolution in fixed income ETFs yesterday when iShares came out with three corporate bond ETFs that target sectors; Financials Sector Bond Fund (MONY), Utilities Sector Bond Fund (AMPS) and Industrials Sector Bond Fund (ENGN).

Buying bonds is not always easy to do for individual investors as a function of size and also the ability (time wise) to track many different individual issues held. The fixed income space in ETF land has become a lot deeper in the last year or so with many foreign funds having come out, I think the concept of the BulletShares from Guggenheim is very useful and now we see the first sector ETFs for domestic corporates.

I think the old Claymore (now Guggenheim) registered similar funds but I am pretty sure they never came to fruition.

The ability to use corporate bond funds without financials is a huge step forward. We own individual issues as part of our fixed income mix but we also use some funds. Long time readers may recall I prefer a mix of both in building both the equity and fixed income sides of the portfolio and so the extent to which the fund side branches into new territory is useful.

The effective duration of ENGN is 7.3 years and the yield to maturity is 3.07%. For MONY the effective duration is 5.4 years and the YTM is 3.84% and for AMPS the effective duration is 8.55 years with a YTM of 3.44%. Those yields may or may not look attractive to you given that overnight money yields zero but don't forget that the way bond ETFs work, that will be the yield unless it isn't--which is to say that there can be no expectation of yield consistency as a function of changes in the market and changes in the share count of a fund even with accrued interest.

It might be possible to observe a range of probable payouts for funds like these but obviously that won't come until it has at least a few payments under its belt.

Bond funds have drawbacks which is ok because individual issues have drawbacks too. The problems only arise when someone buy either type of product without understanding the drawbacks.

If you're a baseball fan, the picture needs no explanation.
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Repeated from Sunday;

Finally some fire department business. In order for Walker Fire to keep up with how the fire industry is evolving we had to buy a vehicle for fighting structure fires. Our previous orientation had just been wildland in terms of our vehicles and our training. This is changing. We have nine firefighters going through structure training over the next few weeks and the truck pictured will be Engine 86 once it is fully stocked.

Engine 86 is a 1986 International that we bought from out of state and it is in fantastic shape (no rust coming from back east) with very low mileage. It was obviously babied and given that we had to do something we really lucked out. The new truck will play a huge role for us.

You probably know where I am going with this. The truck cost $30,000 and we have allocated $10,000 more for stocking the truck with hose, nozzles and other equipment. In the past, blog readers have been very generous toward the department for large capital outlays like this and I hope that will be the case again.

There are two ways to donate. Our web page can accommodate credit cards or a check can be sent to;

Walker Fire Protection Association
5881 S Walker Rd
Prescott, AZ 86303

The website does not allow for specifying the reason for the donation and there can be no guarantee that the check memo will be looked at but there is a way to track how much comes from the blog that I would ask anyone kind to make a donation to do. Whatever dollar amount you would consider please add $0.50.

Joellyn and I will be donating $1000.50. The $0.50 will allow for tracking what comes in from the blog without anyone needing to deal with designated donations. I do not take this sort of thing lightly and I hope I do not create the appearance of taking blog-reader participation for granted but the group has shown a generous willingness to participate before. Thank you and please donate.
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Reader Question

The other day I wrote about changes to the portfolio we've made over the last few months that had the goal of making the portfolio less defensive (selling an inverse index fund and buying two stocks and a narrow ETF). The following questions came into the Seeking Alpha version of the post;

1. How do you track whether these top-down tactical asset allocation decisions are successful over time? Is it easy to separate out the impact of those decisions vs. which particular instruments you choose to implement a top-down strategy?

2. Do you think individual investors should be making tactical asset allocation decisions like this, or would they get sucked into the emotions of the market, resulting in buying high and selling low?

I should preface the post by saying I don't necessarily manage the portfolio in the same manner the questions are framed.

As far as how to "track" whether top down decisions are successful, I think performance of the portfolio versus the market and versus my expectation of both provides pretty quick feedback on decisions. An actively managed portfolio is a series of decisions of which some will be right and some will be wrong. Chances are the portfolio can be successful long term if the decisions made turn out to be correct more often than they are incorrect. Someone who is wrong a lot more often than they are right might need to reassess a few things.

One way to reduce the consequence of being wrong is to make more gradual moves which is what I usually do. In 2007 we started repositioning the portfolio for a defensive posture and kept getting progressively more defensive for seven or eight months--true bear markets start slowly giving plenty of time to get out.

Had 2008 been much different and bottomed out in Q1 or Q2 with a much smaller loss the market would have shown signs of bottoming and that being overly defensive was no longer necessary. This is not a claim of cherry picking a bottom but there are various technical and sentiment indicators that can be helpful here and that I shared in real time as it was happening. Frustratingly for the question there is an element of knowing it when you see it and no two events can be identical but they can be similar. Gradual changes in posturing also minimizes the chance of chasing heat.

Some of the specific decisions can be simplistic and validated or invalidated pretty quickly. Our sale during the summer of Caterpillar (CAT) is a good example. In my opinion, CAT will get crushed in any sort of bear market/recession decline. As mentioned in past posts we sold in the mid $90s and it very quickly went to the mid $60s before staging a fierce recovery. The fast decline validated that the market was indeed worried about something from the top down and the rally then invalidated the concern. We took a little defensive action (selling the CAT when we did) as a starting point. Had things continued to deteriorate we would have done more but the market showed otherwise in the price action. If you conclude that our defensive trade, the sale of CAT, was wrong then we reduced the consequence of being wrong by not going 100% cash at that time.

As to whether individuals should do this I've written many times that I think the extent to which a person is actively involved in managing their portfolio is a function of time available to spend and interest in the pursuit. While there is some portion of the investing public that really is not cut out for this (I realize that is harsh but it is true) I think for many people it can be a function of time and interest. I know from having blogged for a relatively long time now there are plenty of do-it-yourselfers who know far more than many professionals. Someone with average intelligence and the inclination to spend a fair bit of time on the portfolio can absolutely have success regardless of whether they work in the industry or not.
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Stocks Keep Rallying

The run for the US market continued yesterday as the S&P 500 closed at 1351. The SPX has a 7.5% gain for the year which is a great start to the year. You can still be a bear and acknowledge it is a great start to the year for equity prices. If you are a bull you probably think this will continue and if you are a bear you might predict it will end today.

As a quick note I really dislike assigning animal caricatures to market cycles but there is a certain economy of words that is convenient.

My thesis for 2012 has been that there would be a range busting rally that will then mostly retrace. So far this is not wrong but it is worth throwing out a couple of reminders about how markets tend to work. This is an important communication to clients and hopefully non clients can find some utility as well.

If my theory of a range buster turns out to be precisely correct then we might see SPX 1570 by summer time. That level would would represent a 25% rise from the year end figure of 1257--again my thought is big and fast rally that then retraces a lot. Again, this will be right or it will be wrong but if it does go to 1500 or 1550 or even 1600 in such a short time there could easily be a "scary" 10% drop in the middle of that sort of run.

Big fast rallies have happened many times in history. The magnitude of my base case would be far from record setting and if this one turns out to be wrong then rallies like this (20-25% in six months or so) will happen in the future. Big rallies can happen when the fundies are good and when they stink--I happen to think they are not so hot right now.

As excited as the media seems to be about this current lift in the market a swift 10% decline in the middle of this will scare a lot of people, bring out the bearish extrapolators and generally cause an overreaction. You could of course accuse me of overreacting but I did write about this two months ago and began to reorient our positioning before that.

The ways in which my range busting scenario could be wrong are almost limitless. The SPX could stop right here and then go down a lot, it could stop right here and just hover for an extended period, it could go up a lot and then keep going or go up and hover there and so on.

As I mentioned recently, if you actively manage a portfolio you probably have some thoughts about where we are and where we are going. You will be right occasionally and wrong occasionally, when you are right you need to go with it and when you are wrong you need to be able to recognize when you are wrong and figure out how to adapt.
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We Own Apple

An important part of using narrow based ETFs, like sector, country or thematic, is knowing at least a little about any very large holdings in the ETF. I recently wrote about the new iShares Denmark (EDEN) which has about 20% in client holding Novo Nordisk (NVO). This is common in niche ETFs. The Global X Lithium ETF (LIT) has a similar weighting in Chilean based SQM.

This is neither bad nor good, it just is. If for some reason you like lithium but hate SQM then you probably need to find another way in besides the ETF. It is important to remember the ETF is simply one form of access to whatever narrow exposure you are interested in adding. It will have pluses and minuses to consider before buying.

Long time readers may recall we use the iShares DJ Tech ETF (IYW) for most of our technology sector exposure. IYW has an 18.5% weight to Apple (AAPL) which is large and makes keeping some sort of tabs on the name prudent. The extent to which one keeps tabs is up to the end user and fortunately in this case you don't really need to go looking for information on Apple. CNBC talks about multiple times a day and there is plenty of coverage of the name on just about any market-related website you are likely to visit.

Tech makes up just under 20% of the SPX. Someone with an equal weight position in IYW obviously has a 3.7% weight in AAPL (actually the weight of AAPL in iShares S&P 500 (IVV) is 3.74% but you get the idea). To my way of thinking this is no different than owning AAPL directly in conjunction with some broad tech ETF that somehow did not have AAPL in it.

We target most individual equity positions at 2% or 3% of the equity portfolio so the equalweight in IYW (we do not target 20% in IYW) results in a pretty large position in AAPL--at least from my perspective and I would say that even someone who does not use any individual stock does need to stay on top of the stock. Hopefully it is clear that if AAPL somehow cut in half due to some bottom up reason (not a prediction, but instead an observation of risk) then obviously the hit to IYW would be noticeable.

Again this is neither generically good or generically bad it is simply a consideration for using a narrow ETF and obviously I don't view it as a problem as we use the fund for many accounts.

The picture is from when we offloaded Engine 86 when it was delivered.
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Sunday Morning Coffee

The Barron's cover story was called Enter the Bull and tried to make a case for Dow 15000 within two years based on data related to market cycles going back to 1871. That is only 15% from here and if my range busting rally theme for 2012 comes to fruition (big, fast rally that then mostly retraces) then we could touch 15000 pretty quickly so I don't think the call is particularly outrageous.

Also in the article was the "50/50" chance of the Dow getting to 17000 in the two years which got ripped up pretty good in the comments because essentially just about any conceivable outcome has a 50/50 chance of happening.

Either the Dow will go to 15000 or 17000 on the timeline suggested or it won't but I would point out a couple of issues with this type of study. I believe in understanding how cycles tend to work because there are tendencies that often repeat. Often does not mean always but there is something to it. However I can't see the utility in incorporating stock market results from the 1870s and 1880s when twine and cotton companies were the market leaders.

I don't know at what point exactly that historical data is useful for these purposes but at a minimum if the year has a one and an eight in front of it, I don't think there is any relevance whatsoever. Obviously if you disagree then you might give the cover story more credence.

The other issue I would raise is the extent to which the argument presented pays no heed to fundamental current events. I am not making a bearish argument here (I'm not making a bullish one either), simply pointing out that any investment case, even a broad one, should take into account the current fundamental environment. To me this equates to buying a stock solely for the valuation with no heed to the state of the industry. I imagine the TV stocks were all very cheap at one point (there was a TV stock mania in the 1950s).

I did like the Bruce Lee reference in the title though.

Finally some fire department business. In order for Walker Fire to keep up with how the fire industry is evolving we had to buy a vehicle for fighting structure fires. Our previous orientation had just been wildland in terms of our vehicles and our training. This is changing. We have nine firefighters going through structure training over the next few weeks and the truck pictured will be Engine 86 once it is fully stocked.

Engine 86 is a 1986 International that we bought from out of state and it is in fantastic shape (no rust coming from back east) with very low mileage. It was obviously babied and given that we had to do something we really lucked out. The new truck will play a huge role for us.

You probably know where I am going with this. The truck cost $30,000 and we have allocated $10,000 more for stocking the truck with hose, nozzles and other equipment. In the past, blog readers have been very generous toward the department for large capital outlays like this and I hope that will be the case again.

There are two ways to donate. Our web page can accommodate credit cards or a check can be sent to;

Walker Fire Protection Association
5881 S Walker Rd
Prescott, AZ 86303

The website does not allow for specifying the reason for the donation and there can be no guarantee that the check memo will be looked at but there is a way to track how much comes from the blog that I would ask anyone kind to make a donation to do. Whatever dollar amount you would consider please add $0.50.

Joellyn and I will be donating $1000.50. The $0.50 will allow for tracking what comes in from the blog without anyone needing to deal with designated donations. I do not take this sort of thing lightly and I hope I do not create the appearance of taking blog-reader participation for granted but the group has shown a generous willingness to participate before. Thank you and please donate.
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It Does Have To Take Much

A big building block to the way I manage portfolios is trying to build the portfolio to have certain top down characteristics and then to change those characteristics as market circumstances dictate. There are a couple of reasons for this. One is that if I understand how the portfolio behaves then it becomes easier to know how to change the make up of the portfolio--like knowing that a certain name will make the portfolio more volatile when I want more volatility.

Another important reason is so that I can explain to clients why the portfolio is doing what it is doing at a given moment. We have always been heavy in foreign exposure for long term reasons that I have written about in hundreds of other posts. Last year was the first year since I have been at Your Source Financial where foreign lagged domestic badly and so we lagged the SPX last year. The divergence between foreign and domestic was unusually wide, being heavy in foreign has worked out over the long term but not so last year. While anything can happen in any given year it is unlikely, in my opinion, that foreign will lag domestic by that much anytime soon, obviously I think foreign will dramatically outperform over time.

But in terms of understanding the long term objective of the portfolio the next time foreign does lag domestic like it did in 2011 then I would expect our portfolio to lag again. Most of the time owning foreign has been correct year to year but nothing can be right every single year and understanding this ahead of time makes it easier to navigate the cycle and to remember the long term objective and it is the long term that is our focus.

For most of 2011 I would say we did not look much like the S&P 500, we had a lot of cash and a lot of foreign. In the last few months I've disclosed four trades executed for "large" accounts (large accounts defined as being big enough where using mostly individual stocks makes economic sense for the client); we sold a small position in an inverse index fund and then we bought KLA Tencor (KLAC), ASX Limited (ASX.AX) and the Global X Fertilizer ETF (SOIL).

The objectives with these trades was to increase net long exposure to look more like the SPX to capture what I thought would be a good start to the year for the SPX (this is the range busting rally theme I've written about a few times) and to capture what is looking like a snap back move for certain market segments that did poorly last year.

We still have a fair bit of cash but with four trades we've gone from what I would say was not looking much like the market to looking a lot more like the market which was an objective. This is not intended to brag about a result because among other things the time frame is too short to mean anything to clients. The intention of the post is to stress the importance of understanding the portfolio and then to understand how changes are likely to impact the portfolio.

Had one of the new additions gone to zero the day after we bought it then obviously this would have been a different type of post but one thing to understand about something new that you buy is how it trades. I mentioned the other day the extent to which Caterpillar gets crushed when the market goes down a lot (because of recession). The next time there is recession CAT will get crushed and the typical tobacco stock will hold up pretty well. Those two are simple ones while some others might not be so simple. When I disclose a new purchase I usually include some mention of how I expect it to trade and influence the portfolio.

Finally an update on the ETF; the quiet period is over and an updated prospectus has been filed to include more details but we are still extremely limited on what can be said. For now things appear to be proceeding on the timeline that was originally spelled out for us. I would also repeat that anything I say about it here is what I believe I am allowed to say. If there is some specific item you are curious about that I have not addressed, that means I can't put it in print on a blog.

To clear one thing up about this that has come up a couple of different times is that I am staying with my firm. The firm is the sub-advisor and at the firm it is my job to manage the portfolios including any funds we might manage which from where I sit is simply another client. I am in a very good situation work wise, I get to work from home two hours away from the office. In terms of understanding what is important to you (another type of theme on this site) the grass won't get greener than what I have right now.
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Quick Tidbit

Global X launched the Permanent ETF (PERM) which is a pretty true version of the original Harry Browne concept. You can learn more about it through the above link, I should have a full writeup on the fund for theStreet.com in a few days.

My wife found this website with pages and pages of neat cabin photos from around the world if you're interested in that sort of thing. The cabin pictured is from Siberia, check out the cold war-era satellite dish, wow.

Finally I had to take one of our fire trucks to the garage for a once over and noticed the pictured antique or as some might call it parade vehicle. Pretty neat. One of the other departments here has a full service garage that most of the local departments use for vehicle maintenance.
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Hussman on Recession Probabilities

Cullen Roche excerpted John Hussman discussing why he (Hussman) is still in the recession camp, he thinks it is the most likely outcome, and why a 25% decline for equities is likely.

Hussman is commonly believed to be a permabear. For purposes of this post we'll set that question aside. He has been bearish for quite a while and over short bursts of time the performance of the Hussman Strategic Total Return Fund (HSTRX) has lagged the market considerably but longer term he has delivered a result that I believe is consistent with managing for a full cycle result not a quarterly or even annual result.

In 2011 HSTRX was about in line with the S&P 500. For five years the fund is up 12% plus dividends versus a decline of 7% for the S&P 500 on a price basis. Since the March 2009 low the fund is up 10% while SPX is up 95% (all the numbers come from Google Finance). You can decide for yourself on the performance but the fund definitely smooths out the ride for shareholders.

Hussman lays out why the market being higher than it was six months ago and the PMI coming in recently at 54 are not an all clear signs. He equates now to May 2008 when he said the worst was yet to come and he was criticized back then for this opinion. He does concede that things are not as bad now as they were then.

Last summer I wrote that I thought a recession had started. The market had turned down pretty quickly and many of the data points turned down similarly. While I do believe something bad was going on the recession call was probably wrong--I say probably because these things are dated well after the fact but at this point I can't see a recession being dated to last summer.

Evidence that I believed this call was wrong can be dated back quite a few months to selling what was left of our 2X inverse ETF and then making three purchases, thus increasing exposure, subsequently. As I mentioned the other day if you actively manage a portfolio you probably have opinions about what is going on now and what is coming next. When you are right then you just need to go with it but when you are wrong you need to adapt.

While we can always adapt more I think Hussman draws so much criticism because it looks like he doesn't do a whole lot of adapting when he's looking wrong. I can't be certain but lagging by 85% over a three year lift supports the idea that he did not adapt a whole lot. Having opinions and being wrong some portion of the time is ok and is going to happen, the important thing is what you do when you are wrong.

If things turn south again (they will at some point as a function of normal cyclicality) we will heed the 200 DMA and maybe sell a few things or use an inverse fund or maybe some combo of both. Getting defensive doesn't necessarily require a lot of trading.

To Hussman's comparison of now and May 2008, there is at least one huge difference. Back then we did not really have any idea of what awaited us, collectively anyway. At this point I believe we understand the crisis and how bad it is, what we don't yet understand, in my opinion, is how we get out if this mess--I don't think we know how we get back to "normal." Those are different things with different risks and I don't think we are at much risk for a 25% decline unless we get a fast 15% lift from 2011's close.

The above is an opinion and if it turns out to be incorrect I will adapt.
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How and When to Sell

A few comments came in over the weekend asking for my take about when to sell a stock. This is a multi dimensional topic with a lot of variables for each dimension but I will try to cover a lot of ground. Keep in mind this is what we do for client accounts, you may want to do things very differently. I can't say what is right for you, only what we believe is best for our clients. Most of these will be examples of trades we've done and why.

The easiest (for me) one first. If something we own gets a takeover offer or goes up a lot because the market thinks a takeover is coming we are selling the stock. The best example from modern times is Yahoo (YHOO). We owned it for several years and it had some good runs and not so good runs then a few Mays ago it got a takeover offer from Microsoft that Jerry Yang notoriously turned down. We sold it that morning in the pre-market.

We have twice sold Caterpillar for top down cyclical reasons. When the economy goes into recession and subsequent bear market, volatile industrial stocks tend to be hit very hard. We sold just as the financial crisis was starting to be a possibility and we were able to buy it back much cheaper. We sold it again last summer before a big drop, on recession concerns, but it did not drop as much as I thought it might and has since recovered without us.

Over the years we have had several partial sales after parabolic moves up; Statoil (STO) twice, Vale (VALE) once and most recently GLD. We still have positions in all three and we bought Statoil back in late 2008. With all of these sales there was clear and obvious euphoria around the stocks. With the STO sales, oil had gone up a lot in a very short period of time and the stock went up above $40. The GLD sale was just last August. The night we got back from Yellowstone I flipped on Squawk Box Europe and gold was just above $1900 for the first time and knew I would be a seller in GLD the next morning. Part of this type of sale may be frustrating to read but occasionally I get some sort of moment of clarity; sell and so I do even if just a partial sale.

Another reason to sell is when you turn out to be wrong about some aspect of the position.One example for us might be Partner Communications (PTNR). It is an Israeli telecom stock with a very high dividend yield that was well covered when we owned it. We bought and the stock just sort of hovered for a while before starting to erode. It was not a spectacular flame out but it was a disappointing hold. You may or may not be able to figure out why you were wrong but when you suspect that you might be wrong it makes sense to reassess the holding and possibly sell. Every investor will get some wrong, this is guaranteed to happen. Part of owning stocks is to continue to monitor them. No longer being able to figure the stock out is probably a good reason to sell.

Being wrong can manifest itself in several ways. The stock might simply underperform its industry or sector. The thesis for why you bought may turn out to be wrong or maybe you bought too early for the market to care about your thesis or you bought too late and things started to change. Although we never owned the name people who bought Netflix (NFLX) above $250 appear to have been late as en example.

In past posts I've talked about buying stocks or ETFs to bring certain attributes to the portfolio; things like yield, volatility, correlation and so on. For a long time we owned Plum Creek Timber (PCL) for the low correlation to the S&P 500 and the high yield. As time went on it seemed to me the that low correlation affect was going away (meaning the correlation to the SPX was increasing).

There was nothing wrong with the company but one of the reasons to own the name was going away which was a reason to reconsider. The stock seemed to become increasingly popular which might explain the correlation. So I was left with a low vol, high yield name in a sector (materials) where increasing volatility was becoming attractive. The yield and volatility characteristics were easily obtained in other sectors while things in the materials sector looked to be heating up. In that light, owning a low vol name in a sector you think will do well may not be the best strategy.

Quite a few years ago we owned Advanced Auto Parts (AAP). Our timing was lucky and the stock went up much faster than any expectation I could have reasonably had. If something you think should be a slow grower goes on to skyrocket then either you were lucky or wrong about the stock somehow but either way revisiting the thesis makes sense.

A change in the story can be a reason to sell. Although from before I was a portfolio manager, I owned AOL when the merger with Time Warner was announced. This struck me as a profound and meaningful change in the stock I owned, that being AOL. They were buying a bigger slower growing company. I did not know the name would implode, I just knew the story had changed meaningfully.

A similar example was Bank Of America (BAC) purchase of Merrill Lynch. This seemed immediately insane to me because had they waited until the next day they could have paid 50% less. They may have been coerced (I don't remember it that way) but coerced or not they were grossly overpaying.

The above examples obviously make no mention of strategies like putting an 8% stop loss under every holding as some people like to do. The reason I don't do something like this is that 8% means different things to different stocks. An 8% drop in Proctor & Gamble is a different thing than an 8% drop in Research In Motion (RIMM). Another drawback I see with this type of strategy is presumably when you buy something you think it is the best choice for some market segment. If you get stopped out are you then going to buy what you previously thought was second best? Are you going to wait for the stock to go down more and then buy the same name back--what if it doesn't go down? What if the entire market goes down 8%? If the market was down 8% I'm not sure that a stock that dropped in line with the market should be a sell--maybe it should but the 8% drop is not itself enough information.

Occasionally the story for a stock changes, occasionally the fundamentals change (this can be positive to the upside like the examples above), occasionally you will be more right than you expected and occasionally you will simply be wrong for whatever reason. The job of managing a portfolio means paying attention to the holdings and being prepared to occasionally take action. How does big news that is good change things? How does big news that is bad change things? Many of the decisions we make are influenced by top down cyclical factors.

One last example is relatively large positions in employer stock or stock inherited from family members. If that stock were to go to zero what would it do to your financial plan? The more impact it would have the more important it is that you take action toward reducing it. This has nothing to do with prospects for the stock. If half your portfolio is one name and that one name somehow goes to zero, it stands to reason that you'd be in a world of hurt. Avoiding that scenario should be a priority.

There are other examples but I think this creates some understanding of how I come at it which is to look for various types of fundamental changes and use those changes as a catalyst to review and make changes if needed.
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Understand the Moment

We all have our own philosophies on how we deal with life or our process for making decisions including investment decisions. Part of my make up is to try to live in the moment or realize that life is about the journey more so than the destination. Another aspect to living in the moment is understanding the moment.

As some readers may recall I am a huge sports fan and I am from Boston. By the time the Red Sox had won their first world series of the decade in 2004 the Patriots were already the Patriots and I commented to my brother (more of a sports fan than I am) the extent to which we were having a great run. Obviously the run continued for Red Sox, Celtics and Bruins, even the Boston Cannons won a Major League Lacrosse championship, and the Patriots are still the Patriots.

While this has been great it used to not be this way for Boston teams other than the Celtics and it is unlikely that the championships will continue at this rate. To me this makes it all the more emotionally satisfying to realize this is a heyday for the teams I have always rooted for.

This relates to investing and actively managing a portfolio. For the average portfolio manager (this applies to do it yourselfers) there will be periods where he has a heyday of being right about several things for some length of time and then other periods where little to nothing goes right.

When things are going especially well it is important to understand the moment and remember that we are not all of a sudden a lot smarter than we were last year. Likewise we are not all of a sudden a lot dumber than we were last year or six months ago. This speaks to understanding that "being correct" will ebb and flow and anyone who is at least average will go through more ups and downs like this in the future in their investment careers. It is good to not get too full of self when things are going well because that will turn and no one wants to be depressed during a rough run. I think the best is an even keel through all market conditions and personal periods of outperformance and lagging.

I think there will be at least one reader who might comment along the lines of how the above makes the case for index investing. Not quite. It may make the case for index investing for some people but others not. Like a personal philosophy on how to live life, how to invest is based on personal beliefs. Some people should index but it is not right for everyone.
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The Big Picture for the Week of February 5, 2012

After 22 trading days so far this year the S&P 500 is up 6.94%. Anyone may have a bullish outlook or bearish one but right here right now the market is rallying and seems like it has a good head of steam behind it.

About two months ago I posted about my belief that we could be in for a range busting rally. At 1344 the SPX is not there yet but is getting closer--to be clear I am thinking big rally that goes quite a bit higher but does not last. For now this theory is not yet wrong, it is too soon to say correct.

There are two points to this post. One is to clients that if big rally that then fails turns out to be correct then people will start to feel better and better about the market and their portfolios which might make it emotionally difficult if we do some selling at SPX 1500.

The other point is for readers who actively manage their portfolios. Chances are most active managers (including do it yourselfers) always have an opinion on the current state of the market and what might be coming next. The front end analysis in this equation is only part of the work. The back end execution, when you're right, and the ability recognize and adapt when you are wrong is probably more important.

Anyone who is even mediocre, which can absolutely be enough to get the job done successfully, will get some big calls correct.
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Vanguard on Allocation

Index Universe posted some comments from Vanguard on their thoughts about portfolio construction looking out over the current decade. The headline was Stick to Allocation Strategies and from the standpoint of not giving up on equities, I agree completely. I've said before that for people who have learned they just cannot handle the potential volatility with equities fine, just understand the tradeoff of needing to save more.

For those who can generally handle equity volatility I do believe in sticking to their asset allocation, making changes as appropriate for getting older or unexpected changes in life circumstances.

Then as the article, and Vanguard's comments, progressed I found myself disagreeing with much of what they said about equities. I found the following to be a real head-scratcher;

Specifically, Davis said Valley Forge, Pa.-based Vanguard is concerned investors may be tempted these days to reach for yield, chase regions with higher economic growth and pursue alternative investments—all without taking full measure of the plethora of associated risks.

I wanted to include the entire sentence so that context would not be lost but the peculiar comment was "chase regions with higher economic growth." There are studies that conclude there is very little correlation between GDP growth and stock market performance but the results for specific countries in the previous decade paint a different picture for me.

Chasing anything is a bad idea, no question, but there is a difference between chasing some country's returns and doing some research and realizing that looking out over the rest of this decade, which is the time frame the Vanguard has in mind, there are a lot countries with far better prospects than the US--this has been a major theme on this blog since 2004.

Vanguard does say that prospects for developed Europe and Japan look pretty bad so this isn't necessarily a stick to all the old standbys that worked in the 1990s argument. Seemingly contradicting the above passage Vanguard notes that they expect "emerging market economies, as well as Australia, to lead global economic growth in the next decade," but don't chase them?

If you are going use country selection in your process, we do, then I would say to pick countries based on your opinion of future prospects. While buying something that just doubled is probably not a great idea, where they are going is almost always going to be more important than where they've been.

The article may also be another case of misusing the term asset allocation. Other than perhaps conversational expedience I would say that domestic equities and foreign equities are not different asset classes; they are both equities. Different asset classes (from equities) would include bonds, commodities and maybe absolute return--there are others. While I realize opinions differ on this, I think most people come up with some number for their equity exposure as opposed to X% in domestic and Y% so in that context; stick to your allocation strategy.
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These Are Good For Investing Too

A friend posted a link on Facebook from MSN titled 11 Health Habits That Will Help You Live to 100. Quite a few of them can apply to investing as well. An ongoing theme on this site has been that it is guaranteed that there will be years that the stock market will go down. Based on history this will happen 25-30% of the time but either way, in the future there will be down years.

It is also guaranteed that there will be years that we will lag behind whatever the market does. Both of these are guaranteed and if you have any time behind you investing you have already gone through both of these and you've lived to tell the tale.

The tie in to the article is point number 7 which is to be less neurotic. Right here, right now while it is easy to be rational if you know head of time that the market is going to have a down year occasionally and that you will not always beat the market and both have happened to you before then there should be less of an emotional reaction when it happens. This should also make it easier to stay disciplined to whatever your strategy is.

The other point that can tie in directly was point number 1 which was don't retire. The connection made in the article is the observed tendency for people to become less active once they do retire. This is well covered ground here for several different reasons with the most practical reason being that for many people stopping work altogether will not be an option for financial reasons. Working less is very plausible and I think my belief in spending time figuring a way to monetize something you love doing is also plausible.

Obviously a thread like this on a blog is going to be greatly influenced by the blogger's priorities in life. Anyone reading this site for a while probably has a sense of what my priorities are and things in the article relate for the most part. Portfolio success and financial success is much easier to achieve when you have your priorities sorted out. When your life priorities are sorted out then you have a better chance of managing your portfolio for what you actually need not what you think you need.
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Managing Sector Volatility

One part of how I manage the portfolio is monitoring and changing the volatility profile of each sector based on what I think is going on now and what I think comes next based on what is going on now. I mention this in passing far more than I actually spell out what this looks like.

Yesterday on Fast Money Halftime they put a chart on the screen of Under Armor (UA) and client holding Nike (NKE) that serves as a very good way to illustrate this. I grabbed the same chart from BigCharts below.

For my money UA and NKE are proxies for the same thing. Each stock has different trading characteristics but it makes sense that the correlation should be high even if the magnitude of the moves is noticeably different.

Someone who holds NKE is favorably disposed to the demand for athletic apparel and equipment and the willingness for disposable income to continue to go toward the products--probably.

At that level the story at UA is very similar. The two are a little different when you go more in depth. In an environment where the portfolio manager wanted to increase the volatility of the portfolio (presumably because the market was going to move higher) he could sell NKE and swap into UA. If correct about the market in this case then UA should go up more than NKE.

As a practical matter NKE has enough volatility for me for being a discretionary stock so I don't think I would do this exact swap but have done similar ones before. Part of our defensive strategy in 2008 was to shift most of our energy exposure into what was then the WisdomTree International Energy ETF (DKA). Then as we started to get less defensive we came out of DKA into an oil sands stock, a coal ETF and a Colombian oil stock (not all at the same time). We also increased our position in Statoil (STO). To be clear these trades go back quite a ways now.

This portion of the strategy seems like an obvious type of trading and I know that plenty of people do this, anecdotally I also know this is new for some folks.

Finally, last night we had a skunk wrangle. We knew we've had a critter since Sunday morning. He woke us up early Monday morning so I borrowed a trap Monday afternoon from a neighbor but did not set it. We heard nothing Monday night into Tuesday morning but then Roscoe let us know he was back yesterday afternoon so I set the trap and checked it after dinner and that is what we found. He has white stripes all over and actually it took a minute, at a distance, for me to figure what he was. He sprayed once but I was far enough back that he didn't get me.

I approached with a big towel covered the trap, took it out to the pick up truck and drove it out to the forest to let him go. Funny thing is he wouldn't leave, maybe because I was too close so I pried it open with a rock, backed up and it still took him about five minutes to finally leave.
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