Cliff Asness of AQR Capital Management was all over the media this weekend as the interview in Barron's and as the sole guest on WealthTrack with Connie Mack. The WealthTrack interview seemed to be of more interest.
He started out talking about the fact that the market does not go up every year. He really drove home the point in a way that I think is similar to how I have tried to convey it (probably the only thing I have in common with him). He was very matter of fact, the market goes down some years, this has always been the case and always will be the case. I would add that no one can "beat" the market every year. There will be periods where someone will be ahead of the market and periods where they will not. What matters is that you have enough accumulated for when you need it. The two biggest determining factors to having enough are savings habits and avoiding the urge to act on market induced fear (panic selling).
Asness also spelled out a little philosophical detail on how AQR does things. He said that stocks are about making money so people tend to be overweight stocks versus other types of assets, like bonds and commodities, which are about reducing risk.
I might add to that thought that knowing what to avoid can be more important than knowing what to buy.
The asset allocation target they use is to put 25% each into equities, government bonds, real assets (TIPS and commodities) and 25% into the rest of the bond market. Where it gets a little trickier is that the 25% refers to volatility not dollars. To simplify the idea if stocks have twice the volatility of bonds then equal weight between the two would work out to 33.3% of the dollars into stocks and 66.6% of the dollars into bonds.
This approach should get you to think about how important it is to smooth out the ride. This is how I take what AQR is doing to be about. I've written many times about this as a goal of how I try to do things. The panic and emotional distress that results from too much equity exposure at the wrong time can be ruinous yet very people pay enough heed to avoiding situations that would trigger panic.
For anyone who cares Nassim Nicholas Taleb will be on WealthTrack next week.
Read more!
Wikinvest Wire
Monday, August 31, 2009
Sunday, August 30, 2009
Sunday Morning Coffee
Barron's had a brief article about absolute return funds. The article leaned a little skeptical but it brings up a good point. Generally speaking absolute return funds have not participated in the massive rally that started in March. Many are even down a little.
When the market was puking down there was some sentiment about going very heavy into the space which was never a good idea, IMO, for the simple reason that too much of anything is usually a bad idea. During the worst of the declines some of the funds did heroically and now not so much.
This brings up a crucial concept but if you really have a diversified portfolio then not every holding should be going in the same direction. If every holding went up 50% together with the market then how did they do when the market went down 50%?
Small exposures to things like this give a chance to own a few things that either go up a little if the market goes down a lot and even if they go down a little as the market cuts in half they are reducing the volatility. That is great for a down market but not for an up market. That doesn't make an absolute fund a sell because they still offer the same thing as the did seven months ago, they will likely offset a portion of a swift decline.
Last Sunday I spoofed the Best Places to Retire theme by writing about a few towns, very small towns, in states with no income tax bordering states with no sales tax. Reader Stephen Drone amusingly referred to it as a tax arbitrage.
On Friday Yahoo Finance re-ran an article from MarketWatch called 15 Top Rural Areas To Retire and somehow none of the five towns isolated last week made the cut.
The article listed 15 "recreation" counties, three of which were in Colorado. And as mentioned above somehow Rancester, WY didn't make the cut. The article itself was incredibly short on details. It listed estimates of people, by region, of where people are expected to move in this context and vagueness as to and what portion of the population might choose to relocate to rural areas.
The cost of living is unambiguously cheaper and anyone disciplined enough to really live below their means can have a very easy time of it most of the time. There are some serious drawbacks to living away from a big city the biggest probably being healthcare. If anyone in Prescott needs something done they go to Phoenix which is not quite two hours away. Ranchester is about two hours away from Billings, MT. I have no idea whether Billings has adequate medical care or not but that is something that any retiree moving there for the tax arbitrage would need to sort out ahead of time.
This also applies to people who want to go live in Uruguay or New Zealand or wherever.
Now from the how to budget for the unbudgetable file last Monday we had a lightning strike right out side our cabin (it sounded like artillery not thunder) that fried one TV, the washing machine and a wireless headset for the TV.
The new washer comes Wednesday ($800), if the TV needs to be replaced (the coax port works the rest of the back is fried somehow) that will be $400 and the headphones don't have to be replaced but they are $100. I spoke to the insurance company Friday about filing a claim (that is when we found out the washer was broken) but I will remain leery of the insurance company until there is a check in my hand.
Many times in posts about retirement stuff I mention that there are always unexpected things that come up and use examples of new tires and vet bills. If the insurance company jacks us then that is $1200 of unexpected expense. Trust me when I say I realize how fortunate we are to be able to just go take care of it but that could be a big obstacle for a retired couple otherwise happily living on $4000 a month.
I mention the unexpected a lot because I think it is the biggest gap in peoples thought process.
Read more!
When the market was puking down there was some sentiment about going very heavy into the space which was never a good idea, IMO, for the simple reason that too much of anything is usually a bad idea. During the worst of the declines some of the funds did heroically and now not so much.
This brings up a crucial concept but if you really have a diversified portfolio then not every holding should be going in the same direction. If every holding went up 50% together with the market then how did they do when the market went down 50%?
Small exposures to things like this give a chance to own a few things that either go up a little if the market goes down a lot and even if they go down a little as the market cuts in half they are reducing the volatility. That is great for a down market but not for an up market. That doesn't make an absolute fund a sell because they still offer the same thing as the did seven months ago, they will likely offset a portion of a swift decline.
Last Sunday I spoofed the Best Places to Retire theme by writing about a few towns, very small towns, in states with no income tax bordering states with no sales tax. Reader Stephen Drone amusingly referred to it as a tax arbitrage.
On Friday Yahoo Finance re-ran an article from MarketWatch called 15 Top Rural Areas To Retire and somehow none of the five towns isolated last week made the cut.
The article listed 15 "recreation" counties, three of which were in Colorado. And as mentioned above somehow Rancester, WY didn't make the cut. The article itself was incredibly short on details. It listed estimates of people, by region, of where people are expected to move in this context and vagueness as to and what portion of the population might choose to relocate to rural areas.
The cost of living is unambiguously cheaper and anyone disciplined enough to really live below their means can have a very easy time of it most of the time. There are some serious drawbacks to living away from a big city the biggest probably being healthcare. If anyone in Prescott needs something done they go to Phoenix which is not quite two hours away. Ranchester is about two hours away from Billings, MT. I have no idea whether Billings has adequate medical care or not but that is something that any retiree moving there for the tax arbitrage would need to sort out ahead of time.
This also applies to people who want to go live in Uruguay or New Zealand or wherever.
Now from the how to budget for the unbudgetable file last Monday we had a lightning strike right out side our cabin (it sounded like artillery not thunder) that fried one TV, the washing machine and a wireless headset for the TV.
The new washer comes Wednesday ($800), if the TV needs to be replaced (the coax port works the rest of the back is fried somehow) that will be $400 and the headphones don't have to be replaced but they are $100. I spoke to the insurance company Friday about filing a claim (that is when we found out the washer was broken) but I will remain leery of the insurance company until there is a check in my hand.
Many times in posts about retirement stuff I mention that there are always unexpected things that come up and use examples of new tires and vet bills. If the insurance company jacks us then that is $1200 of unexpected expense. Trust me when I say I realize how fortunate we are to be able to just go take care of it but that could be a big obstacle for a retired couple otherwise happily living on $4000 a month.
I mention the unexpected a lot because I think it is the biggest gap in peoples thought process.
Read more!
Saturday, August 29, 2009
Friday, August 28, 2009
CNBC Today
I am scheduled to appear on Closing Bell today about 30 minutes after the close.I hope you can check it out.
Read more!
Yet More On Sectors
As a follow up yesterday's double post here and at Greenfaucet about sector investing and thematic investing based on articles from the Journal of Indexes, there was another article of interest called Sectors In The World of Global Investing.
It is written by David Blitzer and Maureen Maitland. While I will not likely out debate Blitzer on anything I do disagree with his central thesis which is that country selection matters less and less as sector selection matters more and more.
Anyone who has ever read this site will know I am a huge believer in sector investing but country selection is just as important IMO.
Many countries are known for a certain something like Norway and oil, Brazil and natural resources and so on. A decision needs to be made as to whether you want your exposure to a country to be in the area that it is most known for or not. This ultimately boils down to an opinion but for Norway and Brazil I do want what the countries are known for. But for Australia I went with a bank instead of a resource company. For me the process of portfolio building involves selecting countries and then figuring out how they can work into the portfolio best.
During the worst of the bear market (assuming the worst is really behind us) much attention was paid to the fact that correlations all went up (everything went down) and so many people said that diversification did not work.
My thoughts about this have been the same since long before the last bear market started. We saw in the bear market earlier in this decade that all markets went down then as well. The expectation I tried to set here for our clients (and any readers so inclined) was not that other markets won't go down but that might do so on a slightly different time table than our market and thus could start to turn up sooner than our markets. Anyone going in with this expectation may not have concluded foreign diversification did not work.
Another long running theme here has been that the best chance for this different timing effect is to select countries with different economic makeups from the US. For example commodity based economies have a very good chance of being on different economic cycles and so different stock market cycles. I've been writing about Norway, Australia, Brazil and Chile in this light for years.
On the last go around Norway, Brazil and Chile lived up to this billing one way or another.
Read more!
It is written by David Blitzer and Maureen Maitland. While I will not likely out debate Blitzer on anything I do disagree with his central thesis which is that country selection matters less and less as sector selection matters more and more.
Anyone who has ever read this site will know I am a huge believer in sector investing but country selection is just as important IMO.
Many countries are known for a certain something like Norway and oil, Brazil and natural resources and so on. A decision needs to be made as to whether you want your exposure to a country to be in the area that it is most known for or not. This ultimately boils down to an opinion but for Norway and Brazil I do want what the countries are known for. But for Australia I went with a bank instead of a resource company. For me the process of portfolio building involves selecting countries and then figuring out how they can work into the portfolio best.
During the worst of the bear market (assuming the worst is really behind us) much attention was paid to the fact that correlations all went up (everything went down) and so many people said that diversification did not work.
My thoughts about this have been the same since long before the last bear market started. We saw in the bear market earlier in this decade that all markets went down then as well. The expectation I tried to set here for our clients (and any readers so inclined) was not that other markets won't go down but that might do so on a slightly different time table than our market and thus could start to turn up sooner than our markets. Anyone going in with this expectation may not have concluded foreign diversification did not work.
Another long running theme here has been that the best chance for this different timing effect is to select countries with different economic makeups from the US. For example commodity based economies have a very good chance of being on different economic cycles and so different stock market cycles. I've been writing about Norway, Australia, Brazil and Chile in this light for years.
On the last go around Norway, Brazil and Chile lived up to this billing one way or another.
Read more!
Thursday, August 27, 2009
Yes, Exactly!
The current Journal of Indexes (part of IndexUniverse) hits it out of the park devoting the issue to the importance of investing at the sector level. I've been on this soap box for almost five years of blogging and almost four years of writing for theStreet.com.
The tone of this post will be very opinionated as I think this topic is crucial for risk management, risk adjusted returns and possibly even better nominal results. I have never understood why this isn't more widely practiced and I really don't understand how investment professionals can manage accounts and pay no attention to sectors.
Investing at the sector level requires more time spent yes but I think it ultimately makes the task easier. Certain aspects of how sectors behave is quite predictable or more correctly reliable. Over the years I have made several big sector calls that appeared to be right but, and I say this a lot, this sort of thing is far more about just how things work than anything else, as such it is easily repeatable.
During bear markets the starting point is that healthcare, staples, ma-bell telecom and utilities are very likely to go down less, in some cases a lot less, than the broader market. You can take the time to understand why (which is a good idea) but this is very likely to repeat every time. Each sector needs to be be studied at the time to make nothing is unique to that event but this stuff is reliable. Ditto discretionary coming out. Ditto underweighting financials when the yield curve inverts. The list goes on.
Another concept touched on that I have been writing about for a while is knowing what to avoid (or in my case underweight) and that being potentially more important than knowing what to buy.
The path here can be quite simple, time consuming too but still simple. Pick a benchmark index, we use the S&P 500, and take a look at the composition. The SPX has ten big sectors that each have a weighting. Decisions about over, under or equal weighting each of the ten need to be made. I do this by knowing how things usually work combined with what I think is going on to make a forward looking assessment.
The passive guys hate this sort of thing but I don't think there is a compelling argument to be made for passive indexing with broad based products, in fact the article linked above devotes a lot of space to making that exact point. I might add that expecting passive indexing to have a better ten years going forward than the last ten years strikes me as being riskier than investing at the sector level.
Another point about sector weights I make often is don't have huge overweights and anytime a sector gets to 20% of the index that is a warning to be cautious and anytime a sector gets to 30% run screaming from the room.
Once the sector decisions have been made you can figure things like how to add in the countries you want to own, what themes you want exposure to and other things like cap size, volatility, yield and so on--for anyone inclined to go that far.
There are obviously plenty of sector ETFs to get this done which helps avoid single stock risk for people not comfortable with that and can reduce some of the granularity that goes along with what I have in mind. I wrote a 3500 word article for the Money Show on exactly this topic (using narrow based ETFs to build a portfolio at the sector level) but have not been able to find it online anywhere. If anyone can find a link please post it in the comments.
Journal of Indexes also has an article by Christian Magoon from Claymore about thematic ETFs as substitutes for sector funds. I agree with him only to a point. I am going to write about that for GreenFaucet today. You can check here if you interested in my thoughts.
Read more!
The tone of this post will be very opinionated as I think this topic is crucial for risk management, risk adjusted returns and possibly even better nominal results. I have never understood why this isn't more widely practiced and I really don't understand how investment professionals can manage accounts and pay no attention to sectors.
Investing at the sector level requires more time spent yes but I think it ultimately makes the task easier. Certain aspects of how sectors behave is quite predictable or more correctly reliable. Over the years I have made several big sector calls that appeared to be right but, and I say this a lot, this sort of thing is far more about just how things work than anything else, as such it is easily repeatable.
During bear markets the starting point is that healthcare, staples, ma-bell telecom and utilities are very likely to go down less, in some cases a lot less, than the broader market. You can take the time to understand why (which is a good idea) but this is very likely to repeat every time. Each sector needs to be be studied at the time to make nothing is unique to that event but this stuff is reliable. Ditto discretionary coming out. Ditto underweighting financials when the yield curve inverts. The list goes on.
Another concept touched on that I have been writing about for a while is knowing what to avoid (or in my case underweight) and that being potentially more important than knowing what to buy.
The path here can be quite simple, time consuming too but still simple. Pick a benchmark index, we use the S&P 500, and take a look at the composition. The SPX has ten big sectors that each have a weighting. Decisions about over, under or equal weighting each of the ten need to be made. I do this by knowing how things usually work combined with what I think is going on to make a forward looking assessment.
The passive guys hate this sort of thing but I don't think there is a compelling argument to be made for passive indexing with broad based products, in fact the article linked above devotes a lot of space to making that exact point. I might add that expecting passive indexing to have a better ten years going forward than the last ten years strikes me as being riskier than investing at the sector level.Another point about sector weights I make often is don't have huge overweights and anytime a sector gets to 20% of the index that is a warning to be cautious and anytime a sector gets to 30% run screaming from the room.
Once the sector decisions have been made you can figure things like how to add in the countries you want to own, what themes you want exposure to and other things like cap size, volatility, yield and so on--for anyone inclined to go that far.
There are obviously plenty of sector ETFs to get this done which helps avoid single stock risk for people not comfortable with that and can reduce some of the granularity that goes along with what I have in mind. I wrote a 3500 word article for the Money Show on exactly this topic (using narrow based ETFs to build a portfolio at the sector level) but have not been able to find it online anywhere. If anyone can find a link please post it in the comments.
Journal of Indexes also has an article by Christian Magoon from Claymore about thematic ETFs as substitutes for sector funds. I agree with him only to a point. I am going to write about that for GreenFaucet today. You can check here if you interested in my thoughts.
Read more!
Wednesday, August 26, 2009
Stock Picker's Market? Really?
BusinessWeek served up a couple of nuggets from Bob Olstein. He is quoted as saying that "investors need to focus on quality of earnings and choose companies that have been able to generate free cash flow even during the financial crisis."
I may be wrong but my hunch is he would say the exact same thing at any point in the stock market cycle. In fact he pretty much said the exact same thing back in April, 2008 on CNBC making a case for Citigroup.
Anyone can spin this any way they would like but I can't imagine any stock that rallied the full 50% with the market since March, or more than 50%, did do because of cash flow, quality earnings or any other valuation metric. A 50% move in six months, even if it is a new bull and even if it does not go down again, is a panic.
Earnings power does not drive panics. I believe panic drives panics.
In 2007 the S&P 500 was up about 5% (including dividends). If one year is enough time for stocks to outperform because of cash flow and earnings quality then a year like 2007 would be the time for that to happen.
Olstein's thesis in April 2008 focused on Citi and was dreadfully wrong. I do not know what else he owned at the time but I imagine that any utility stocks he owned had attractive cash flow and earnings quality and they did relatively well. I also imagine that any healthcare stocks he owned had attractive cash flow and earnings quality and also did well.
Except they didn't do well because of attractive cash flow and earnings quality they did well because utilities and healthcare almost always do well during large declines.
Stock picker's market? Not so much.
Read more!
I may be wrong but my hunch is he would say the exact same thing at any point in the stock market cycle. In fact he pretty much said the exact same thing back in April, 2008 on CNBC making a case for Citigroup.
Anyone can spin this any way they would like but I can't imagine any stock that rallied the full 50% with the market since March, or more than 50%, did do because of cash flow, quality earnings or any other valuation metric. A 50% move in six months, even if it is a new bull and even if it does not go down again, is a panic.
Earnings power does not drive panics. I believe panic drives panics.
In 2007 the S&P 500 was up about 5% (including dividends). If one year is enough time for stocks to outperform because of cash flow and earnings quality then a year like 2007 would be the time for that to happen.
Olstein's thesis in April 2008 focused on Citi and was dreadfully wrong. I do not know what else he owned at the time but I imagine that any utility stocks he owned had attractive cash flow and earnings quality and they did relatively well. I also imagine that any healthcare stocks he owned had attractive cash flow and earnings quality and also did well.
Except they didn't do well because of attractive cash flow and earnings quality they did well because utilities and healthcare almost always do well during large declines.
Stock picker's market? Not so much.
Read more!
Tuesday, August 25, 2009
Tuesday Tidbits
BusinessWeek sums up some of the latest chatter from and about the Harvard Endowment making the rounds on Monday. Last Friday I wrote about the endowment over at GreenFaucet. In that post I wondered whether HMC might bring more of the fund in house to manage and given their use of ETFs might their demand lead directly to new specialized funds being created.
It might go something like this..."Hello, iShares? Its Jane at HMC, we'd like to you to create a ETF comprised of junior mining companies from around the world and we want to put $300 million into it."
So the way B-week tells it HMC will be bringing more money in house. It would seem to me that proven user of ETFs who could easily commit a couple hundred mill to a fund could get an ETF provider to put something together for them without much hesitancy. Then the fund could be marketed to the public with "This is the ETF Harvard wanted us to create for them." If any of this holds water we might see quite a bit of new innovation come to the industry.
Israel has become the first country to have its central bank raise rates going from 0.50% to 0.75%.
A reader asked me to critique John Hussman's portfolio now that the semi-annual report is out (I did not see the report but I'll assume the reader is correct about it being out). I wrote about Hussman seeming to express frustration about having lagged the rally that started in March. He talked about his discipline preventing him from being more exposed to equities. As opposed to my critiquing the portfolio he seems to be doing it himself; it is easy, without the full benefit of hindsight, to say he has been wrong. From the low the SPX is up about 50% and his fund appears to be up mid single digits.
I've written before about the difference between lagging and missing a big rally. Without hindsight he appears to have missed it. If the SPX goes back down to 700 then I am likely to think he didn't get suckered by the market.
As a matter of philosophy I am not comfortable being so reliant on one outcome as Hussman appears to be. I say that thinking that up 5% in an up 50% world means he really hedged the hell out of his portfolio. I wrote about this a lot and was questioned about it a lot. Zero exposure (or net zero exposure) is a huge bet. I have been convinced that the market needs to go down again and scare the hell out of people. For now that is wrong but I have not changed my mind. The last time I wrote about this someone left a comment saying I was trying to explain why the market was wrong and not going with the trend.
I come at this differently than the way the reader framed it. I try not to let the consequences of being wrong be ruinous which is done by not overly relying on one outcome.
Read more!
It might go something like this..."Hello, iShares? Its Jane at HMC, we'd like to you to create a ETF comprised of junior mining companies from around the world and we want to put $300 million into it."
So the way B-week tells it HMC will be bringing more money in house. It would seem to me that proven user of ETFs who could easily commit a couple hundred mill to a fund could get an ETF provider to put something together for them without much hesitancy. Then the fund could be marketed to the public with "This is the ETF Harvard wanted us to create for them." If any of this holds water we might see quite a bit of new innovation come to the industry.
Israel has become the first country to have its central bank raise rates going from 0.50% to 0.75%.
A reader asked me to critique John Hussman's portfolio now that the semi-annual report is out (I did not see the report but I'll assume the reader is correct about it being out). I wrote about Hussman seeming to express frustration about having lagged the rally that started in March. He talked about his discipline preventing him from being more exposed to equities. As opposed to my critiquing the portfolio he seems to be doing it himself; it is easy, without the full benefit of hindsight, to say he has been wrong. From the low the SPX is up about 50% and his fund appears to be up mid single digits.
I've written before about the difference between lagging and missing a big rally. Without hindsight he appears to have missed it. If the SPX goes back down to 700 then I am likely to think he didn't get suckered by the market.
As a matter of philosophy I am not comfortable being so reliant on one outcome as Hussman appears to be. I say that thinking that up 5% in an up 50% world means he really hedged the hell out of his portfolio. I wrote about this a lot and was questioned about it a lot. Zero exposure (or net zero exposure) is a huge bet. I have been convinced that the market needs to go down again and scare the hell out of people. For now that is wrong but I have not changed my mind. The last time I wrote about this someone left a comment saying I was trying to explain why the market was wrong and not going with the trend.
I come at this differently than the way the reader framed it. I try not to let the consequences of being wrong be ruinous which is done by not overly relying on one outcome.
Read more!
Monday, August 24, 2009
Notes From The Big Shoe
So after doing a stint at the Money Show this weekend I thought I would try to share a couple of observations. I've never been to one of these before so that being said there was a lot of microcap stocks with booths in the exhibition hall hocking their wares (trying to get their story out). There were a lot of tall, leggy (not so) supermodels that were part of this process as well.
I got a chance to meet a couple of blog readers who were kind enough to introduce themselves while I was taking my turn at the booth for GreenFaucet. It made for an easier time than trying to start a conversation dead cold.
Most of the folks attending were older. My comments about anything (for both panels I was on) were very consistent with the stuff I write about but I'm not sure how relevant my stuff about increasing or decreasing volatility was for them although one lady stood up asked about taking a flier on sugar so there you go.
I did several short video segments that should be on the Money Show website at some point with Karen Gibbs and she moderated the lunch panel I participated in. She was an anchor on CNBC in the mid 1990s (maybe longer than that) and I have nothing but good things to say.
As far as some actual content in the lunch panel we kind of harped on knowing what is under the hood of the ETFs that you buy. There seemed to be a feeling that people don't necessarily know when a stock makes up 15% of one fund and the potential consequences of that.
It also seemed that the audience at the lunch panel didn't know much about ETFs which is interesting given that everyone there cares enough about investing to go to an investing convention (of sorts) in the first place. So there is a long way to go in terms of furthering understanding.
The first panel was a discussion of the merits of fundamental investing versus technical analysis versus quantitative modeling. The quant guy was Dave Brown from Sabrient, Dave is literally a rocket scientist. The audience in this panel was smaller and seemed more engaged perhaps this group was a little more hands on with their investing.
While I have to honestly say I have had more fun at other events the bottom line that the folks going are going out of there way to try to learn more about investing. Presumably you are doing the same thing by visiting a site like this one or any market related blog. The importance of this is only going to increase if things that people fear are happening to the US are even partially correct.
Read more!
I got a chance to meet a couple of blog readers who were kind enough to introduce themselves while I was taking my turn at the booth for GreenFaucet. It made for an easier time than trying to start a conversation dead cold.
Most of the folks attending were older. My comments about anything (for both panels I was on) were very consistent with the stuff I write about but I'm not sure how relevant my stuff about increasing or decreasing volatility was for them although one lady stood up asked about taking a flier on sugar so there you go.
I did several short video segments that should be on the Money Show website at some point with Karen Gibbs and she moderated the lunch panel I participated in. She was an anchor on CNBC in the mid 1990s (maybe longer than that) and I have nothing but good things to say.
As far as some actual content in the lunch panel we kind of harped on knowing what is under the hood of the ETFs that you buy. There seemed to be a feeling that people don't necessarily know when a stock makes up 15% of one fund and the potential consequences of that.
It also seemed that the audience at the lunch panel didn't know much about ETFs which is interesting given that everyone there cares enough about investing to go to an investing convention (of sorts) in the first place. So there is a long way to go in terms of furthering understanding.
The first panel was a discussion of the merits of fundamental investing versus technical analysis versus quantitative modeling. The quant guy was Dave Brown from Sabrient, Dave is literally a rocket scientist. The audience in this panel was smaller and seemed more engaged perhaps this group was a little more hands on with their investing.
While I have to honestly say I have had more fun at other events the bottom line that the folks going are going out of there way to try to learn more about investing. Presumably you are doing the same thing by visiting a site like this one or any market related blog. The importance of this is only going to increase if things that people fear are happening to the US are even partially correct.
Read more!
Sunday, August 23, 2009
The Five Best Places To Retire!
Every type of personal finance publication goes to this well several times year so why not a blog? This post was motivated by an article on Yahoo Finance about which states are tax friendly. According to the article seven states have no income tax and five states have no sales tax. It occurred to me that maybe the best idea is to live in a state with no income tax but be close enough to a state with no sales tax to go buy all your stuff.
The way it works out you could live in South Dakota or Wyoming and shop in Montana. The other spot where this works is living in Nevada or Washington and getting what you need in Oregon. With that in mind here are the five best places to retire!
1) Ranchester, Wyoming
Ranchester is a few miles from the Montana border and as best as I can tell the nearest town in Montana is Wyola which is 21 miles away. Beyond Wyola is Billings, MT which is another 96 miles away. Billings has Costco, Walmart and Home Depot. It would be a bummer if you got home and realized you forgot spacers for your tile project, or Teflon tape for your plumbing job but that is close enough to be functional.
I found 16 real estate listings for Ranchester on realtor.com. A range between $200,000 and $300,000 would certainly get it done, there were a couple for less than $200,000 but I have to say $200k-$300k seems a little high to me but it is probably affordable for folks coming from a bigger town.
2) Spearfish, South Dakota
If you move to Spearfish the whole idea kind of unravels. I looked at maps on several websites and it appears as though there is literally nothing in southeast Montana. Billings is 420 miles away, oops.
Maybe that is why out of 270 real estate listings 103 were below $200,000. Rapid City, South Dakota is close by but you do have to pay sales tax remember. A partial offset to not avoiding sales tax is that according to a site called Tax Foundation, South Dakota ranks 33rd out of 50 (a lower number is better) for property tax collection per household at $2469 as of 2006. If you figure that Spearfish is not one of the bigger towns then maybe the number is a little lower there.
3) Walla Walla, WA
Walla Walla might actually be a real possibility. The nearest Oregon town is Millton-Freewater which is about ten minutes away but there is a Home Depot less than an hour away in Hermiston, OR which also has a Walmart but there is no Costco (or Sam's Club). For anything big, like a Voodoo Doughnut, Portland is four hours away.
Realtor.com only had 21 listings and only nine of them were below $300,000 which again surprised me.
4)Homer, AK
Alaska kills both birds so to speak; no sale tax or income tax plus you get a check of varying size from the Permanent Fund. I've written about the Permanent Fund both on the blog and for theStreet.com. There was one year where it paid out over $2000 so for a couple living modestly that could be one month's worth of expenses which could take a little burden off of the portfolio. Unfortunately the payout has actually been a lot less than that most other years. Quite candidly and perhaps unfairly, every time I have ever looked at the investment results they are not great and anytime I read the commentary they are explaining poor results.
Homer appears to be quite far from anything, 222 miles from Anchorage which has more there than anywhere else in the state. I have read a couple of articles over the years proclaiming Homer to be a good place to live. There were 181 listings on Realtor.com and 103 of them were below $300,000.
5) Denio, NV
Denio, NV is near Denio, Oregon but I'm not sure there is actually a town in either location. I found one house listed in Nevada for $170,000 but it was on some sort of Yahoo page not Realtor.com. The picture indicates there is at least one other building besides the house for sale but if anyone is from that area please let us now if there is a town there. Even if there are towns there, both Denios are a long way from anything.
This post is obviously mostly tongue in cheek. Anyone really fired up about this could live across from Portland in Washington or live near Anchorage (there is plenty that would be difficult about living in Alaska).
I do think the idea is unique and saving a few thousand on income tax and a few thousand on sales tax in a year could make a difference in annual expenses and relieve the portfolio a little.
While the idea of doing backhoe work in Ranchester, WY while your partner makes a little money answering texted questions for KGB and driving to Billings every two weeks for provisions is not going to be the solution for too many people this is a different way to think about things. And I think that far more people will have to be very resourceful to make their "retirements" work.
Read more!
The way it works out you could live in South Dakota or Wyoming and shop in Montana. The other spot where this works is living in Nevada or Washington and getting what you need in Oregon. With that in mind here are the five best places to retire!
1) Ranchester, Wyoming
Ranchester is a few miles from the Montana border and as best as I can tell the nearest town in Montana is Wyola which is 21 miles away. Beyond Wyola is Billings, MT which is another 96 miles away. Billings has Costco, Walmart and Home Depot. It would be a bummer if you got home and realized you forgot spacers for your tile project, or Teflon tape for your plumbing job but that is close enough to be functional.I found 16 real estate listings for Ranchester on realtor.com. A range between $200,000 and $300,000 would certainly get it done, there were a couple for less than $200,000 but I have to say $200k-$300k seems a little high to me but it is probably affordable for folks coming from a bigger town.
2) Spearfish, South Dakota
If you move to Spearfish the whole idea kind of unravels. I looked at maps on several websites and it appears as though there is literally nothing in southeast Montana. Billings is 420 miles away, oops.Maybe that is why out of 270 real estate listings 103 were below $200,000. Rapid City, South Dakota is close by but you do have to pay sales tax remember. A partial offset to not avoiding sales tax is that according to a site called Tax Foundation, South Dakota ranks 33rd out of 50 (a lower number is better) for property tax collection per household at $2469 as of 2006. If you figure that Spearfish is not one of the bigger towns then maybe the number is a little lower there.
3) Walla Walla, WA
Walla Walla might actually be a real possibility. The nearest Oregon town is Millton-Freewater which is about ten minutes away but there is a Home Depot less than an hour away in Hermiston, OR which also has a Walmart but there is no Costco (or Sam's Club). For anything big, like a Voodoo Doughnut, Portland is four hours away.Realtor.com only had 21 listings and only nine of them were below $300,000 which again surprised me.
4)Homer, AK
Alaska kills both birds so to speak; no sale tax or income tax plus you get a check of varying size from the Permanent Fund. I've written about the Permanent Fund both on the blog and for theStreet.com. There was one year where it paid out over $2000 so for a couple living modestly that could be one month's worth of expenses which could take a little burden off of the portfolio. Unfortunately the payout has actually been a lot less than that most other years. Quite candidly and perhaps unfairly, every time I have ever looked at the investment results they are not great and anytime I read the commentary they are explaining poor results.Homer appears to be quite far from anything, 222 miles from Anchorage which has more there than anywhere else in the state. I have read a couple of articles over the years proclaiming Homer to be a good place to live. There were 181 listings on Realtor.com and 103 of them were below $300,000.
5) Denio, NV
Denio, NV is near Denio, Oregon but I'm not sure there is actually a town in either location. I found one house listed in Nevada for $170,000 but it was on some sort of Yahoo page not Realtor.com. The picture indicates there is at least one other building besides the house for sale but if anyone is from that area please let us now if there is a town there. Even if there are towns there, both Denios are a long way from anything.This post is obviously mostly tongue in cheek. Anyone really fired up about this could live across from Portland in Washington or live near Anchorage (there is plenty that would be difficult about living in Alaska).
I do think the idea is unique and saving a few thousand on income tax and a few thousand on sales tax in a year could make a difference in annual expenses and relieve the portfolio a little.
While the idea of doing backhoe work in Ranchester, WY while your partner makes a little money answering texted questions for KGB and driving to Billings every two weeks for provisions is not going to be the solution for too many people this is a different way to think about things. And I think that far more people will have to be very resourceful to make their "retirements" work.
Read more!
Saturday, August 22, 2009
Friday, August 21, 2009
Don't Fear The Reaper
A good thread busted out in the comments on yesterday's post. A reader asked me to weigh in on my concerns about inflation (hyper or otherwise) and the status of the dollar. Another reader asked for my take on financial stocks and REITs.
So let's roll 'em up and dive in.
The current event has been surprising to me in its magnitude. The things I relied on to be underweight financials (the sector's weighting in the SPX and the inversion of the yield curve) warn of problems they don't say anything about magnitude. Simply heeding those warnings means not having to be correct about magnitude. I only held one REIT across the board, Equity Residential (EQR), which I sold in late 2007. Other trades in the sector included a swap out of Barclays (BCS) and into Santander de Chile (SAN) in December 2007 and then I bought Chicago Mercantile (CME) very far into the bear market but it still went down a lot after I bought but has come way back. I still have one Australian bank and one Canadian bank that are bull market holdovers that I hope to hold forever but if they do something like buy a Merrill Lynch I wouldn't hesitate to sell it right away as was the case with BAC.
So that is the background for anyone new. Going forward I have given up on REITs as diversifiers. While it is true that correlations across the board went higher during the bear the correlation of REITs to financials seemed to go up very early on as opposed to closer to the end like a lot of things did. Not that I will never buy one, just that I have lost faith in their ability to offer diversification.
I am a couple of percentage points underweight versus the index. Domestic financial stocks have roared back price wise to be sure but I don't think the massive run is justified fundamentally. After going down a ton they came screaming back that is a normal market reaction but I don't really want to put client money into stocks that have no, IMO, fundamental basis for being bought. I have a stock picked out that I expect to buy in the sector that would take me close to equal weight that while clearly a financial is not a bank, brokerage or insurance company--beyond that I'm not going to front run it. I am also open to buying something like Hong Kong Exchanges (HKXCY) for certain accounts down the road but that would be a long way down the road if ever. About all I can say about that name now is that it makes a good first impression (please, do not add 1+1 and get eleven here).
As far as the fate of the US dollar and so on. I have had the same big picture thoughts about all of this for years and they have not changed much because of the crisis. I have felt that the US would have to share its role of world economic superpower. Other countries are growing faster and becoming more relevant in the world economic order; China for all its issues is more relevant than it used to be. This would cause there to be a little less demand for the greenback which puts some upward pressure on US interest rates and maybe gooses up inflation some.
As for inflation I think hyperinflation is off the table. The dollar is likely to have to share the role of world reserve currency. This means that plenty of countries will still need, want and use USD. Allowing it to hyperinflate hurts everyone so it is in everyone's interest to prevent it. That is not to say that inflation can't go up to a point of being quite uncomfortable but hyper seems very unlikely.
Since first putting this together in the early days of this site we have seen rates panic lower as the financial system came closer to a meltdown than people thought possible. My idea for interest rates was something close to 6-7% for long rates but we now have further to travel to that point which means the discomfort of that adjustment could be more uncomfortable.
I would point out that all of these things are likely to play out over many years. Indeed I believe this entire decade will be viewed as part of one massive but slow moving adjustment.
Regardless of the particulars I think the outcome will be similar. This not doomsday but more of a headwind the result of which, IMO, will be below normal returns for US equity markets which isn't that horrible because we've already been living with that for ten years. I've been saying we need to increase foreign exposure for years and I think that will continue to be the case. While this has been correct thus far it has also been a very obvious conclusion to draw and I believe no less obvious now.
Read more!
So let's roll 'em up and dive in.
The current event has been surprising to me in its magnitude. The things I relied on to be underweight financials (the sector's weighting in the SPX and the inversion of the yield curve) warn of problems they don't say anything about magnitude. Simply heeding those warnings means not having to be correct about magnitude. I only held one REIT across the board, Equity Residential (EQR), which I sold in late 2007. Other trades in the sector included a swap out of Barclays (BCS) and into Santander de Chile (SAN) in December 2007 and then I bought Chicago Mercantile (CME) very far into the bear market but it still went down a lot after I bought but has come way back. I still have one Australian bank and one Canadian bank that are bull market holdovers that I hope to hold forever but if they do something like buy a Merrill Lynch I wouldn't hesitate to sell it right away as was the case with BAC.
So that is the background for anyone new. Going forward I have given up on REITs as diversifiers. While it is true that correlations across the board went higher during the bear the correlation of REITs to financials seemed to go up very early on as opposed to closer to the end like a lot of things did. Not that I will never buy one, just that I have lost faith in their ability to offer diversification.
I am a couple of percentage points underweight versus the index. Domestic financial stocks have roared back price wise to be sure but I don't think the massive run is justified fundamentally. After going down a ton they came screaming back that is a normal market reaction but I don't really want to put client money into stocks that have no, IMO, fundamental basis for being bought. I have a stock picked out that I expect to buy in the sector that would take me close to equal weight that while clearly a financial is not a bank, brokerage or insurance company--beyond that I'm not going to front run it. I am also open to buying something like Hong Kong Exchanges (HKXCY) for certain accounts down the road but that would be a long way down the road if ever. About all I can say about that name now is that it makes a good first impression (please, do not add 1+1 and get eleven here).
As far as the fate of the US dollar and so on. I have had the same big picture thoughts about all of this for years and they have not changed much because of the crisis. I have felt that the US would have to share its role of world economic superpower. Other countries are growing faster and becoming more relevant in the world economic order; China for all its issues is more relevant than it used to be. This would cause there to be a little less demand for the greenback which puts some upward pressure on US interest rates and maybe gooses up inflation some.
As for inflation I think hyperinflation is off the table. The dollar is likely to have to share the role of world reserve currency. This means that plenty of countries will still need, want and use USD. Allowing it to hyperinflate hurts everyone so it is in everyone's interest to prevent it. That is not to say that inflation can't go up to a point of being quite uncomfortable but hyper seems very unlikely.
Since first putting this together in the early days of this site we have seen rates panic lower as the financial system came closer to a meltdown than people thought possible. My idea for interest rates was something close to 6-7% for long rates but we now have further to travel to that point which means the discomfort of that adjustment could be more uncomfortable.
I would point out that all of these things are likely to play out over many years. Indeed I believe this entire decade will be viewed as part of one massive but slow moving adjustment.
Regardless of the particulars I think the outcome will be similar. This not doomsday but more of a headwind the result of which, IMO, will be below normal returns for US equity markets which isn't that horrible because we've already been living with that for ten years. I've been saying we need to increase foreign exposure for years and I think that will continue to be the case. While this has been correct thus far it has also been a very obvious conclusion to draw and I believe no less obvious now.
Read more!
Thursday, August 20, 2009
I May Get Some Hate Mail Over This One
Yesterday I read two different articles that were different in a lot of ways but actually quite similar. They were similar, IMO, because they both tried to tackle somewhat intangible aspects of the financial crisis.
The first article was by Rob Arnott for IndexUniverse that was quite lengthy talking about behaviors to avoid that usually make for poorer returns. The other was a guest post by Richard Alford, Dennis Santiago and Chris Whalen and on Barry Ritholtz' site that tried to break down whether the various things that went wrong over the last couple of years really were Black Swans and if not what we can learn from the non-swans. That was my take anyway--the article was pretty meaty.
The Arnott piece, despite being the shorter of the two, seemed very long winded to me and not particularly useful. Arnott is unquestionably smarter than I am and knows more than I do but I find his articles to be far too text-book like. You know the saying about asking someone what time it is and they tell you how to build a watch, that is what I feel like when I read Arnott, and I do read him for the reasons mentioned above and because I might miss something. But that was not the case in the above linked article.
The Alford, Santiago, Whalen post on the other hand was at a more intellectual level that spurred thought process. For people who had been paying attention for a while wasn't some sort of trouble visible for a while? Jimmy Rogers had been poo-pooing Fannie and Freddie since the 1990s. Home prices went on a great run immediately after internet stocks did. We just had some spectacular failures in 2000-2002 so spectacular failures occurring again so soon after things started to come apart couldn't have been completely out of left field.
I believe I have some credibility here in that I thought something bad was coming to the financial sector but I did miss by a wide margin on the magnitude.
When I first started this blog in 2004, so before too many people saw what was coming including me, I mentioned quite a few of what I would call building blocks or truism that stand up regardless of the circumstance. They were true in 2004 about the then next scary event and are true today about future scary events.
These include the failure of companies that could never fail (is this any truer than with GM?). During the next scary event, whenever that is, there will again be spectacular failures. When things move up abnormally fast they eventually go down in a manner that is inconceivable. Think about it this way, the internet lived up to the hype, maybe it even exceeded the hype, yet many of the companies went bust and of the ones that held on, a lot of those dropped 90% and have not come anywhere near where they were.
Bear markets and fast declines come along every so often and they always cause the same reactions. People panic and are convinced this one is far worse than anything that has ever happened and they sell a meaningful amount of stock at the worst possible time. I don't think anyone says ahead of time well if the market crashes I'm going to panic sell after the drop but a lot of people do.
The Alford, Santiago, Whalen post is very useful for trying to learn how to assess these things proactively at a higher level which I believe is a better path then getting caught up in a bunch of jargon.
Read more!
The first article was by Rob Arnott for IndexUniverse that was quite lengthy talking about behaviors to avoid that usually make for poorer returns. The other was a guest post by Richard Alford, Dennis Santiago and Chris Whalen and on Barry Ritholtz' site that tried to break down whether the various things that went wrong over the last couple of years really were Black Swans and if not what we can learn from the non-swans. That was my take anyway--the article was pretty meaty.
The Arnott piece, despite being the shorter of the two, seemed very long winded to me and not particularly useful. Arnott is unquestionably smarter than I am and knows more than I do but I find his articles to be far too text-book like. You know the saying about asking someone what time it is and they tell you how to build a watch, that is what I feel like when I read Arnott, and I do read him for the reasons mentioned above and because I might miss something. But that was not the case in the above linked article.
The Alford, Santiago, Whalen post on the other hand was at a more intellectual level that spurred thought process. For people who had been paying attention for a while wasn't some sort of trouble visible for a while? Jimmy Rogers had been poo-pooing Fannie and Freddie since the 1990s. Home prices went on a great run immediately after internet stocks did. We just had some spectacular failures in 2000-2002 so spectacular failures occurring again so soon after things started to come apart couldn't have been completely out of left field.
I believe I have some credibility here in that I thought something bad was coming to the financial sector but I did miss by a wide margin on the magnitude.
When I first started this blog in 2004, so before too many people saw what was coming including me, I mentioned quite a few of what I would call building blocks or truism that stand up regardless of the circumstance. They were true in 2004 about the then next scary event and are true today about future scary events.
These include the failure of companies that could never fail (is this any truer than with GM?). During the next scary event, whenever that is, there will again be spectacular failures. When things move up abnormally fast they eventually go down in a manner that is inconceivable. Think about it this way, the internet lived up to the hype, maybe it even exceeded the hype, yet many of the companies went bust and of the ones that held on, a lot of those dropped 90% and have not come anywhere near where they were.
Bear markets and fast declines come along every so often and they always cause the same reactions. People panic and are convinced this one is far worse than anything that has ever happened and they sell a meaningful amount of stock at the worst possible time. I don't think anyone says ahead of time well if the market crashes I'm going to panic sell after the drop but a lot of people do.
The Alford, Santiago, Whalen post is very useful for trying to learn how to assess these things proactively at a higher level which I believe is a better path then getting caught up in a bunch of jargon.
Read more!
Wednesday, August 19, 2009
Let's Be Careful Out There
Yesterday I read this post on FT Alphaville about IPOs in China. There was a reference to a recently listed company called China State Construction Engineering. Some new Shanghai listings are really initial offerings and some are simply new to the Shanghai market and based on the Alphaville post I was not certain what category China State Construction Engineering fell into.
I went Yahoo finance and started typing C h i n a S t a t and one of the choices in the drop down was a pink sheet ADR listed on the Yahoo page as China State Cons ADR (CCOHY). Ok, so I guess it is was listed elsewhere and just new in Shanghai. With a name like that I want to take a look and see what's what.
Not so fast my friend!
I called Schwab's global desk and asked if CCOHY was the correct symbol for China State Construction Engineering and it is not. CCOHY is for China State Construction International Holding which is a different company doing most (maybe all) of its work in Hong Kong. So it's not like it's confusing or anything.
If you are one to try to learn a little about some of these companies that come to the market or get mentioned here and there (mostly CNBC Asia) you really need to be sure you are looking at the correct company and have your symbols straight. A lot of the names are similar or have similar words in the name like the word construction etc.
For studying purposes you might be able to afford wasted time looking at the wrong stock but it could be a different story if you bought the wrong stock.
Read more!
I went Yahoo finance and started typing C h i n a S t a t and one of the choices in the drop down was a pink sheet ADR listed on the Yahoo page as China State Cons ADR (CCOHY). Ok, so I guess it is was listed elsewhere and just new in Shanghai. With a name like that I want to take a look and see what's what.
Not so fast my friend!I called Schwab's global desk and asked if CCOHY was the correct symbol for China State Construction Engineering and it is not. CCOHY is for China State Construction International Holding which is a different company doing most (maybe all) of its work in Hong Kong. So it's not like it's confusing or anything.
If you are one to try to learn a little about some of these companies that come to the market or get mentioned here and there (mostly CNBC Asia) you really need to be sure you are looking at the correct company and have your symbols straight. A lot of the names are similar or have similar words in the name like the word construction etc.
For studying purposes you might be able to afford wasted time looking at the wrong stock but it could be a different story if you bought the wrong stock.
Read more!
Tuesday, August 18, 2009
The Next Big Thing For ETFs
Well, what I think should be the next biggest thing for the ETF industry anyway... On Squawk Australia on Tuesday morning (Australia time) a company called Fortescue Metals (FMG in Australia and maybe FSUMY on the US pinks) made a lot of news because of contract negotiations with China. If you watch CNBC Asia you might have heard of Fortescue before otherwise probably not.
Fortescue is one of a zillion, by my count (ahem), of small or mid cap materials companies out there that are not easily accessed by US based investors. As I say small or mid cap they may not be that small in their own country, for example Yara International (YAR in Norway, YARIY on the pinksheets) has an $8 billion market cap according to the Businessweek quote page which is big for Norway but doesn't make it big enough to make a dent in the iShares Global Materials ETF (MXI) which some clients own.
Buying MXI or the similar WisdomTree International Basic Materials Fund (DBN) is a reasonable way to build the materials portion of a diversified portfolio, better in my opinion that the Materials Sector SPDR (XLB) which is heavier in US chemical companies which I think is less compelling. If you buy MXI or DBN you are going to get a lot of BHP Billiton, Rio Tinto, BASF (also a chemical company) and Anglo American which some clients own.
There's nothing wrong with those companies and by extension those funds but there are plenty of other interesting companies in the materials sector out there. You can get a sense of what is out there by looking at the holdings page for each fund, specifically at the names that make up less than 1% of each fund. If you look at the company websites of some of them you will see some interesting things going on.
Even beyond the fund holdings there are interesting stocks; somehow Israel Chemical (ICL in Israel ISCHY on the US pinks) isn't in either MXI or DBN unless I missed it. The company is not exactly obscure, it is the second largest holding in the iShares Israel ETF (EIS) at 10% of the fund.
You might be thinking hey if you can get Israel Chemical through EIS why doesn't Roger shut his cake hole. This brings up the idea of secondary effects of ETFs or other funds that can be proxies for reducing cap size at the sector level. iShares Peru (EPU) is 65% materials so that could be a proxy in this context. The Colombia ETF (GXG) not so much as that fund is heaviest by far in financials.
Perhaps the EG Shares Metals & Mining ETF (EMT) should have a seat at this table. It invests in emerging market materials companies. Either of the coal ETFs could also partly fill this role and we haven't even talked about the many smaller, but real, companies in Canada.
My thought with this though is accessing a broad swath of second tier, maybe that is a good term, companies from both developed and emerging countries. Funds like this could be a way into to parts of the market that can be difficult to access for several reasons with individual stocks and are too small to move the needle in the existing ETFs.
I think the idea of mid cap sector ETFs (or whatever better name anyone can offer) could be applied to quite a few sectors but not all, at least I don't think all of them. I will try to talk this up at the MoneyShow this weekend if any ETF representatives are there and I also know one or two people that work in the industry so I'll try to reach out to them. If you are a person in the industry reading this and you want to discuss it more please reach out to me and we talk chat it up further.
Read more!
Fortescue is one of a zillion, by my count (ahem), of small or mid cap materials companies out there that are not easily accessed by US based investors. As I say small or mid cap they may not be that small in their own country, for example Yara International (YAR in Norway, YARIY on the pinksheets) has an $8 billion market cap according to the Businessweek quote page which is big for Norway but doesn't make it big enough to make a dent in the iShares Global Materials ETF (MXI) which some clients own.
Buying MXI or the similar WisdomTree International Basic Materials Fund (DBN) is a reasonable way to build the materials portion of a diversified portfolio, better in my opinion that the Materials Sector SPDR (XLB) which is heavier in US chemical companies which I think is less compelling. If you buy MXI or DBN you are going to get a lot of BHP Billiton, Rio Tinto, BASF (also a chemical company) and Anglo American which some clients own.
There's nothing wrong with those companies and by extension those funds but there are plenty of other interesting companies in the materials sector out there. You can get a sense of what is out there by looking at the holdings page for each fund, specifically at the names that make up less than 1% of each fund. If you look at the company websites of some of them you will see some interesting things going on.
Even beyond the fund holdings there are interesting stocks; somehow Israel Chemical (ICL in Israel ISCHY on the US pinks) isn't in either MXI or DBN unless I missed it. The company is not exactly obscure, it is the second largest holding in the iShares Israel ETF (EIS) at 10% of the fund.
You might be thinking hey if you can get Israel Chemical through EIS why doesn't Roger shut his cake hole. This brings up the idea of secondary effects of ETFs or other funds that can be proxies for reducing cap size at the sector level. iShares Peru (EPU) is 65% materials so that could be a proxy in this context. The Colombia ETF (GXG) not so much as that fund is heaviest by far in financials.
Perhaps the EG Shares Metals & Mining ETF (EMT) should have a seat at this table. It invests in emerging market materials companies. Either of the coal ETFs could also partly fill this role and we haven't even talked about the many smaller, but real, companies in Canada.
My thought with this though is accessing a broad swath of second tier, maybe that is a good term, companies from both developed and emerging countries. Funds like this could be a way into to parts of the market that can be difficult to access for several reasons with individual stocks and are too small to move the needle in the existing ETFs.
I think the idea of mid cap sector ETFs (or whatever better name anyone can offer) could be applied to quite a few sectors but not all, at least I don't think all of them. I will try to talk this up at the MoneyShow this weekend if any ETF representatives are there and I also know one or two people that work in the industry so I'll try to reach out to them. If you are a person in the industry reading this and you want to discuss it more please reach out to me and we talk chat it up further.
Read more!
Monday, August 17, 2009
Someone's Got To Make Them
On Monday morning Ansell reported earnings that were pretty good but the company gave mixed signals in comments about its outlook. What is Ansell? Never heard of it? Neither had I. Ansell is an Australian company, the local ticker is ANN and the ADR ticker is ANSLY, it is the world's largest rubber glove maker. It makes occupational gloves, like for hospitals and EMS and it also makes gloves for home use, like the rubber gloves you might use for certain types of cleaning.
According to the Businessweek quote page (which is fantastic for information on foreign stocks) it trades at 11 times earnings, has a $1.3 billion market cap (not sure if that is AUD or USD), yields 2.9%, trades at 13 times cash flow, has AUD$73 million in cash, it does have a fair bit of debt but has cut the debt load substantially in the last couple of years.
A few days ago I mentioned that at some point I will want to increase my exposure to Australia from a target of 3% to more like 5-6%. I said I did not want to add another bank and while a mining company would be an obvious choice many countries have materials companies that it might makes sense to save that part of the portfolio for tougher to reach countries.
From the top down, reducing cap size and adding foreign in the healthcare sector is not so easy to do (well not for me anyway). There is no reasonable risk of the gloves poisoning people, no generic replacement risk, there is no chance that a hospital will decide to cut back because the product is too expensive. I suppose one threat would be a rubber glove that somehow was more comfortable (meaning your hands don't sweat as much). As someone who has to wear rubber gloves every so often it is not a fun thing. I obviously have no idea whether such an innovation is possible but given that Ansell prides itself on Technological Leadership it would be tough to imagine another company sneaking up on them with a sweatless rubber glove.
The chart is somewhat compelling in that the stock at times clearly diverges from the ASX 200 and holders have come through the bear market thus far much better than buying the index, save for a few week window last fall.
The thesis here is simple to construct, the question is whether or not Ansell fits in or not. If not are there any others? Cochlear, the hearing aid (apologies if that is the incorrect term) company is an Aussie company that trades on the pinks with ticker CHEOF. I don't know anything about Cochlear and last night was the first time I ever heard of Ansell so for now all this is about is the first step in the process of learning about a company, its stock and whether it could fit in to the portfolio in the future.
Read more!
According to the Businessweek quote page (which is fantastic for information on foreign stocks) it trades at 11 times earnings, has a $1.3 billion market cap (not sure if that is AUD or USD), yields 2.9%, trades at 13 times cash flow, has AUD$73 million in cash, it does have a fair bit of debt but has cut the debt load substantially in the last couple of years.
A few days ago I mentioned that at some point I will want to increase my exposure to Australia from a target of 3% to more like 5-6%. I said I did not want to add another bank and while a mining company would be an obvious choice many countries have materials companies that it might makes sense to save that part of the portfolio for tougher to reach countries.
From the top down, reducing cap size and adding foreign in the healthcare sector is not so easy to do (well not for me anyway). There is no reasonable risk of the gloves poisoning people, no generic replacement risk, there is no chance that a hospital will decide to cut back because the product is too expensive. I suppose one threat would be a rubber glove that somehow was more comfortable (meaning your hands don't sweat as much). As someone who has to wear rubber gloves every so often it is not a fun thing. I obviously have no idea whether such an innovation is possible but given that Ansell prides itself on Technological Leadership it would be tough to imagine another company sneaking up on them with a sweatless rubber glove.The chart is somewhat compelling in that the stock at times clearly diverges from the ASX 200 and holders have come through the bear market thus far much better than buying the index, save for a few week window last fall.
The thesis here is simple to construct, the question is whether or not Ansell fits in or not. If not are there any others? Cochlear, the hearing aid (apologies if that is the incorrect term) company is an Aussie company that trades on the pinks with ticker CHEOF. I don't know anything about Cochlear and last night was the first time I ever heard of Ansell so for now all this is about is the first step in the process of learning about a company, its stock and whether it could fit in to the portfolio in the future.
Read more!
Sunday, August 16, 2009
Sunday Morning Coffee
The New York Times has a write up on a book called Why Iceland:How One Of The World's Smallest Countries Became The Meltdown's Biggest Casualty. The book is written by Asgeir Johnsson who among other things is the chief economist at Kaupthing Bank which used to be the largest bank in the country.
I started writing about Iceland several years ago before the last big burst higher for that market which was then followed by a slow unraveling that then gave way to a spectacular implosion. The draw for me is that its proximity to both continents and geothermal heat make it a logical destination data storage and smelting allowing it to play a larger role in the world economic order. I believe this argument is still in tact but I do not know how realistic it is; when like Michael Vick will Iceland get a second chance?
While the theme above was making very slow progress the country was, as we know now, becoming a massively over leveraged hedge fund of sorts and as meteoric as the rise up was so too was the decline truly astounding. People took out mortgages in euros (maybe some other currencies too) because the rates were much cheaper. As the banks started to blow up for their leverage the krona cut in half in just a few days which doubled the mortgage payments. If you have a mortgage, how jammed up would you be if your September payment was twice what you paid in August?
The big three banks (Kaupthing, Glitnir and Landsbanki) were all much bigger than the economy which meant that there was no way for the country to help should anything bad ever happen which obviously was the outcome. When the banks went under the savings of depositors was gone. Where is your money? Wherever it may be, chances are you trust that the institution won't disappear anytime soon. How jammed up would you be if all your money did disappear and there was no FDIC or SIPC rescue?
According to the NYT article one point Jonsson seems to be making is that the combination of a small population, the currency not being a reserve currency and "limited fiscal capabilities" a financial crisis was inevitable. This line of thought leads him to the idea that the UK and Switzerland are candidates for a similar fate as Iceland. The ability to rescue the banks if they had to would be extremely difficult for those countries compared to the US (you probably read about this repeatedly last fall) but the currencies are far more mainstream than ISK. And while I suppose they could have more problems coming I don't think the "reserve currency" issue stands up. Taken literally, the USD is the only reserve currency so there would have to be many countries capable of collapsing and while Latvia appears on this path it is far less clear that collapse in the UK and Switzerland is a reasonable risk.
Of course you avoid the consequence by not having too much exposure to these places and avoiding their financial companies.
One point of interest to me was the debate of sorts going on in the country whether to return to being more of a resource based economy, as opposed to financial based, or integrate into the Eurozone thus losing some (or all?) of its of its identity. Naively perhaps, I hope they avoid the EU and can figure a way to go it alone. This would likely mean a longer road to real health but I think once achieved would make for a better long term result.
The picture is looking up the main drag in Reykjavik, Bankastræti, towards the shopping area from where all the banks are (were?).
Read more!
I started writing about Iceland several years ago before the last big burst higher for that market which was then followed by a slow unraveling that then gave way to a spectacular implosion. The draw for me is that its proximity to both continents and geothermal heat make it a logical destination data storage and smelting allowing it to play a larger role in the world economic order. I believe this argument is still in tact but I do not know how realistic it is; when like Michael Vick will Iceland get a second chance?
While the theme above was making very slow progress the country was, as we know now, becoming a massively over leveraged hedge fund of sorts and as meteoric as the rise up was so too was the decline truly astounding. People took out mortgages in euros (maybe some other currencies too) because the rates were much cheaper. As the banks started to blow up for their leverage the krona cut in half in just a few days which doubled the mortgage payments. If you have a mortgage, how jammed up would you be if your September payment was twice what you paid in August?
The big three banks (Kaupthing, Glitnir and Landsbanki) were all much bigger than the economy which meant that there was no way for the country to help should anything bad ever happen which obviously was the outcome. When the banks went under the savings of depositors was gone. Where is your money? Wherever it may be, chances are you trust that the institution won't disappear anytime soon. How jammed up would you be if all your money did disappear and there was no FDIC or SIPC rescue?According to the NYT article one point Jonsson seems to be making is that the combination of a small population, the currency not being a reserve currency and "limited fiscal capabilities" a financial crisis was inevitable. This line of thought leads him to the idea that the UK and Switzerland are candidates for a similar fate as Iceland. The ability to rescue the banks if they had to would be extremely difficult for those countries compared to the US (you probably read about this repeatedly last fall) but the currencies are far more mainstream than ISK. And while I suppose they could have more problems coming I don't think the "reserve currency" issue stands up. Taken literally, the USD is the only reserve currency so there would have to be many countries capable of collapsing and while Latvia appears on this path it is far less clear that collapse in the UK and Switzerland is a reasonable risk.
Of course you avoid the consequence by not having too much exposure to these places and avoiding their financial companies.
One point of interest to me was the debate of sorts going on in the country whether to return to being more of a resource based economy, as opposed to financial based, or integrate into the Eurozone thus losing some (or all?) of its of its identity. Naively perhaps, I hope they avoid the EU and can figure a way to go it alone. This would likely mean a longer road to real health but I think once achieved would make for a better long term result.
The picture is looking up the main drag in Reykjavik, Bankastræti, towards the shopping area from where all the banks are (were?).
Read more!
Saturday, August 15, 2009
The Big Picture For The Week of August 16, 2009
Short post today. I am having router problems that the Geek Squad says can't be, my ISP people say can't be yet I am having them anyway. I will throw in the towel and go get a new router today after fire training. I am working on a Vista laptop that we bought for my wife a few months ago that she despises and I know what she means. It is brutal.
If it turns out it really is not the router then it is the Think Pad that I bought with the help of reader input back in the winter of 2007. I love that that laptop so my fingers are crossed.
Next weekend I am going to to San Francisco to speak on a couple of ETF panels at the Money Show. In one panel I'll be talking as the fundamental guy, as opposed to technical, and in the other it is just an ETF free for all. The good news is that BART is going on strike so instead of a $2 train ride from SFO to downtown it will be a $40 cab ride. Yes!
A thought occurs to me in light of the listing of the Market Vectors Vietnam ETF (VNM) and the large weighting to materials stocks; there needs to be an ETF that owns plantations (rubber, palm oil, coffee), food (like fisheries and dairies) and maybe miners of coal and whatever else is in the ground there. So many of the ETFs for that part of the world are in financials or in Taiwan's case tech but there are plenty of companies in the various materials groups that would be worth exploring via an ETF. This type of thing is what I have in mind about serious innovation coming to the industry, well I hope it does.
Yesterday I made a reference to minor league baseball. The WSJ had an article about the minor leagues. According to the journal there are 8532 players under contract, if there are 30 players to a team (which I can't vouch for) then there could be as many as 284 team out there to go get some seasonal work from in area that interests you, making a couple of assumption in the same context as yesterday's post.
Earlier in the week I had occasion to help a client with his 401k and was very disappointed to see that for all but one category there was only one fund to choose from. It has been a while since I was a 401k participant but I do look at plans in the context of doing my job and one choice for every category (except one) seems awful. There is a reasonable case for not overloading participants as most folks do not want to spend a lot of time with this stuff but only one fund to choose from? Ouch.
I saw this link on the WSJ site about low lobster prices. Is there a Lobster Income Trust in Canada we can trade? I got a million of them folks!
Read more!
If it turns out it really is not the router then it is the Think Pad that I bought with the help of reader input back in the winter of 2007. I love that that laptop so my fingers are crossed.
Next weekend I am going to to San Francisco to speak on a couple of ETF panels at the Money Show. In one panel I'll be talking as the fundamental guy, as opposed to technical, and in the other it is just an ETF free for all. The good news is that BART is going on strike so instead of a $2 train ride from SFO to downtown it will be a $40 cab ride. Yes!
A thought occurs to me in light of the listing of the Market Vectors Vietnam ETF (VNM) and the large weighting to materials stocks; there needs to be an ETF that owns plantations (rubber, palm oil, coffee), food (like fisheries and dairies) and maybe miners of coal and whatever else is in the ground there. So many of the ETFs for that part of the world are in financials or in Taiwan's case tech but there are plenty of companies in the various materials groups that would be worth exploring via an ETF. This type of thing is what I have in mind about serious innovation coming to the industry, well I hope it does.
Yesterday I made a reference to minor league baseball. The WSJ had an article about the minor leagues. According to the journal there are 8532 players under contract, if there are 30 players to a team (which I can't vouch for) then there could be as many as 284 team out there to go get some seasonal work from in area that interests you, making a couple of assumption in the same context as yesterday's post.
Earlier in the week I had occasion to help a client with his 401k and was very disappointed to see that for all but one category there was only one fund to choose from. It has been a while since I was a 401k participant but I do look at plans in the context of doing my job and one choice for every category (except one) seems awful. There is a reasonable case for not overloading participants as most folks do not want to spend a lot of time with this stuff but only one fund to choose from? Ouch.
I saw this link on the WSJ site about low lobster prices. Is there a Lobster Income Trust in Canada we can trade? I got a million of them folks!
Read more!
Friday, August 14, 2009
Friday Randoms
My friend Kirk Kinder has a post up at his blog about Ayn Rand which then points to a more detailed article about Ayn Rand at CNBC.com. Let me say I'm not an an expert here but the combo of articles does a good job of setting up some of the philosophical dilemmas we have before us and how we may have come to have these dilemmas.
One thought provoking point for me personally in the CNBC post (it was written by a couple of people from the Ayn Rand Center) comes up with the following;
I misread it the first time. At first glance I thought it was about being selfish at the expense of other people. I am a huge believer in living a life of service (I view my job this way, the writing, firefighting and what my wife does with animal rescue). I'm glad I reread it. The reason for this little tangent is that too many people misread things without going back to reread. Poor communication by virtue of adding 1+1 and getting eleven is quite prevalent.
The Market Vectors Vietnam ETF (VNM) is due to start trading today. I have an article about it into theStreet.com that I won't front run here but I will say that I am impressed by the sector balance. Also if you look under the hood at the underlying companies (if the info is not there now it will be soon) then I think you can learn a lot about the country. You would need to go to the websites of the companies to learn but both HAGL and Hoa Phat look like interesting companies to get some sense of what is happening there.
There are other countries that I think would be very interesting to own at some point if they came with ETFs. Kazakhstan comes to mind if resources prices continue to trend up over the next decade for now there are some serious problems though.
Another alternative retirement idea; I watched most of the Steelers/Cardinals game last night and they talked about Dick LeBeau who will be 72 next month and still works as an assistant coach for the Steelers. I believe assistant coaches in the NFL make a decent wage. All attempted humor aside for people who are sports fans there are jobs available with teams (or perhaps more correctly the arenas) that are seasonal, probably don't pay a lot but probably can be fun. In Prescott we have three minor league teams and they all need seasonal workers.
We don't have minor league baseball here yet. That might be the one job that would get me out of the cabin.
A little more humor; we watched the show on TLC about hoarders the other night and now half my clothes are on their way to Goodwill.
Anyone know if there is a Hot Dog Cart Income Trust we can invest in?
Read more!
One thought provoking point for me personally in the CNBC post (it was written by a couple of people from the Ayn Rand Center) comes up with the following;
This is what Ayn Rand called a morality of rational self-interest. It is a selfishness that consists, not of doing whatever you feel like, but of using your mind to discover what will truly make you happy and successful.
I misread it the first time. At first glance I thought it was about being selfish at the expense of other people. I am a huge believer in living a life of service (I view my job this way, the writing, firefighting and what my wife does with animal rescue). I'm glad I reread it. The reason for this little tangent is that too many people misread things without going back to reread. Poor communication by virtue of adding 1+1 and getting eleven is quite prevalent.
The Market Vectors Vietnam ETF (VNM) is due to start trading today. I have an article about it into theStreet.com that I won't front run here but I will say that I am impressed by the sector balance. Also if you look under the hood at the underlying companies (if the info is not there now it will be soon) then I think you can learn a lot about the country. You would need to go to the websites of the companies to learn but both HAGL and Hoa Phat look like interesting companies to get some sense of what is happening there.
There are other countries that I think would be very interesting to own at some point if they came with ETFs. Kazakhstan comes to mind if resources prices continue to trend up over the next decade for now there are some serious problems though.
Another alternative retirement idea; I watched most of the Steelers/Cardinals game last night and they talked about Dick LeBeau who will be 72 next month and still works as an assistant coach for the Steelers. I believe assistant coaches in the NFL make a decent wage. All attempted humor aside for people who are sports fans there are jobs available with teams (or perhaps more correctly the arenas) that are seasonal, probably don't pay a lot but probably can be fun. In Prescott we have three minor league teams and they all need seasonal workers.
We don't have minor league baseball here yet. That might be the one job that would get me out of the cabin.
A little more humor; we watched the show on TLC about hoarders the other night and now half my clothes are on their way to Goodwill.
Anyone know if there is a Hot Dog Cart Income Trust we can invest in?
Read more!
Thursday, August 13, 2009
Twofer Thursday
Well the rally in stocks seems to continue unabated defying all sorts of things and spreading good cheer throughout the land. Around Christmas I said that I expected a big rally to come (because that is how it usually works) but this has exceeded what I had in mind both in magnitude and duration.
In just over five months the S&P 500 is up 51% and while may people think it can go higher Michael Kahn mentioned yesterday that the bear market down trend line doesn't come into play until SPX 1100. When the market was at its lows I commented that it is not as bad as it seems. Up here I would say things are not as good as they seem. It doesn't take much to think the crowd may not have it exactly right or that the people who completely missed the crisis before won't correctly declare it over now.
For a little historical perspective that I concede may not be apples to apples, from the March 2003 low of 800 the SPX was at 980 five months later which is a 22.5% gain on its way to a 38% gain from that low to the end of the year before flattening out. We are now up 51% in five months.
There was a low in October 2002 of 798. It went up to 938 by Thanksgiving only to go back down again by March. The fall 2002 rally was 17.5% in two and a half months before turning back down. We are now up 51% in five months.
The rally off of the 1998 double bottom took the SPX up 32% in three months before going sideways for a while. We are now up 51% in five months. The Asian contagion of 1997 barely shows up on the chart. The rally that ignited after the start of the first Iraq war took the market up 18% in a month before going sideways for a while. We are now up 51% in five months.
Of course the current rally has been impressive for its duration and magnitude but it has exceeded reasonably visibility in terms of where revenue is headed, the reality of the jobs situation (unemployment went down due to workforce contraction), the real state of the consumer, the real health of the banks, the reality of the real estate market, the sheer massiveness of the budget and ensuing deficit and more. None of this precludes the market from going higher but the declining volume tells us there is some air under there and I for one am glad to have some cash built up in case these things turn out to matter.
As a follow up to yesterday's post about Canadian investment trusts I stumbled across the Liquor Stores Income Trust LIQ-UN in Canada and LQSIF on the pinksheets. It owns over 200 liquor stores in Canada, a bunch in Alaska and just bought several Liquor Barn stores in Kentucky. I did not look under the hood but like many of the trusts it got pasted in the bear market, has come back some but has held the dividend steady. If you're thinking that liquor store traffic would hold up during a big economic contraction (I would think so) then the decline, more than 50%, might surprise you. If I have time I'll try to learn a little more.
Liquor stores! Wow.
Read more!
In just over five months the S&P 500 is up 51% and while may people think it can go higher Michael Kahn mentioned yesterday that the bear market down trend line doesn't come into play until SPX 1100. When the market was at its lows I commented that it is not as bad as it seems. Up here I would say things are not as good as they seem. It doesn't take much to think the crowd may not have it exactly right or that the people who completely missed the crisis before won't correctly declare it over now.
For a little historical perspective that I concede may not be apples to apples, from the March 2003 low of 800 the SPX was at 980 five months later which is a 22.5% gain on its way to a 38% gain from that low to the end of the year before flattening out. We are now up 51% in five months.
There was a low in October 2002 of 798. It went up to 938 by Thanksgiving only to go back down again by March. The fall 2002 rally was 17.5% in two and a half months before turning back down. We are now up 51% in five months.
The rally off of the 1998 double bottom took the SPX up 32% in three months before going sideways for a while. We are now up 51% in five months. The Asian contagion of 1997 barely shows up on the chart. The rally that ignited after the start of the first Iraq war took the market up 18% in a month before going sideways for a while. We are now up 51% in five months.
Of course the current rally has been impressive for its duration and magnitude but it has exceeded reasonably visibility in terms of where revenue is headed, the reality of the jobs situation (unemployment went down due to workforce contraction), the real state of the consumer, the real health of the banks, the reality of the real estate market, the sheer massiveness of the budget and ensuing deficit and more. None of this precludes the market from going higher but the declining volume tells us there is some air under there and I for one am glad to have some cash built up in case these things turn out to matter.
As a follow up to yesterday's post about Canadian investment trusts I stumbled across the Liquor Stores Income Trust LIQ-UN in Canada and LQSIF on the pinksheets. It owns over 200 liquor stores in Canada, a bunch in Alaska and just bought several Liquor Barn stores in Kentucky. I did not look under the hood but like many of the trusts it got pasted in the bear market, has come back some but has held the dividend steady. If you're thinking that liquor store traffic would hold up during a big economic contraction (I would think so) then the decline, more than 50%, might surprise you. If I have time I'll try to learn a little more.
Liquor stores! Wow.
Read more!
Wednesday, August 12, 2009
Innovation North of the Border
Yesterday's post included a reference to a small sugar company called Imperial Sugar (IPSU). Right on cue a reader a comment pointing us to Rogers Sugar Income Trust RSI-UN in Canada or RSGUF on the US pinksheets. The company is no relation to Jimmy Rogers or, ahem, me. The company recently merged with Lantic Sugar (Lantic was shortened from Atlantic, pretty clever eh?).
There is plenty of info on the Rogers website about the company, the financials, the analysts covering it and the history of the company. Over the last couple of years I have come to find that the people in investor relations for these trusts are glad to talk to you and call you back and that the analysts following them are willing to reply to email (I would not try to call an analyst).
In looking at the chart for Rogers Sugar versus the iPath Sugar ETN (SGG) it is not clear to me that Rogers Sugar is a proxy for the commodity. At first glance yes but if you look a little closer there are some clear divergences. The chart only goes back 13 months which is apparently when SGG started trading.
For the last few months the correlation seems very tight but I am not sure it makes sense to trust that because everything except treasuries is up a lot in the last few months and I am not sure if what we are seeing is is true fundamental connection or a rising tide.
In skimming the the financials, the company appears to have have decent cash flow, a little bit of cash on hand, not much debt and demand for its product. The fund pays out 3.8 cents a month putting the yield at 10.75%.
There are bunch of different types of trusts like this in Canada covering things like hydroelectricity, timber, geothermal, cocoa and probably a couple I'm forgetting. I first stumbled across the concept a couple of years ago and have been fascinated ever since but never bought one. That is probably a good things as all of the ones I looked at got pasted in the bear market but have generally participated in the snap back, even the ones that dropped 80%. Despite the bloodshed price wise it appears that many of them maintained their dividends throughout but if I have that wrong, hopefully someone will be kind enough to speak up.
I have not ruled out owning one of these at some point but I have drawn a couple of conclusions about them collectively. They are very cyclical, at least they trade like they are. It would probably make sense for one the trusts to be the first to go, or close to it, upon starting to take defensive portfolio action. They appear, as businesses, to run smoothly most of the time but only be a couple of slow quarters away from struggling. The massive payouts would seem to not leave a lot of room for error or economic slowdowns.
Similar to port and related stocks talked about yesterday, the trusts are not islands unto themselves merrily paying their fat dividends ever after. That does not mean they should be avoided, just realized for what they are which is volatile high yielders that are cyclical.
Read more!
There is plenty of info on the Rogers website about the company, the financials, the analysts covering it and the history of the company. Over the last couple of years I have come to find that the people in investor relations for these trusts are glad to talk to you and call you back and that the analysts following them are willing to reply to email (I would not try to call an analyst).
In looking at the chart for Rogers Sugar versus the iPath Sugar ETN (SGG) it is not clear to me that Rogers Sugar is a proxy for the commodity. At first glance yes but if you look a little closer there are some clear divergences. The chart only goes back 13 months which is apparently when SGG started trading.
For the last few months the correlation seems very tight but I am not sure it makes sense to trust that because everything except treasuries is up a lot in the last few months and I am not sure if what we are seeing is is true fundamental connection or a rising tide.In skimming the the financials, the company appears to have have decent cash flow, a little bit of cash on hand, not much debt and demand for its product. The fund pays out 3.8 cents a month putting the yield at 10.75%.
There are bunch of different types of trusts like this in Canada covering things like hydroelectricity, timber, geothermal, cocoa and probably a couple I'm forgetting. I first stumbled across the concept a couple of years ago and have been fascinated ever since but never bought one. That is probably a good things as all of the ones I looked at got pasted in the bear market but have generally participated in the snap back, even the ones that dropped 80%. Despite the bloodshed price wise it appears that many of them maintained their dividends throughout but if I have that wrong, hopefully someone will be kind enough to speak up.
I have not ruled out owning one of these at some point but I have drawn a couple of conclusions about them collectively. They are very cyclical, at least they trade like they are. It would probably make sense for one the trusts to be the first to go, or close to it, upon starting to take defensive portfolio action. They appear, as businesses, to run smoothly most of the time but only be a couple of slow quarters away from struggling. The massive payouts would seem to not leave a lot of room for error or economic slowdowns.
Similar to port and related stocks talked about yesterday, the trusts are not islands unto themselves merrily paying their fat dividends ever after. That does not mean they should be avoided, just realized for what they are which is volatile high yielders that are cyclical.
Read more!
Tuesday, August 11, 2009
Twofer Tuesday
First up is an article from Barron's with some good information about the sugar market and a peculiar trade recommendation. Jimmy Rogers seems partial to sugar, along with cotton, in every interview he says the fundamentals are improving but never seems to mention what the fundies are. The Barron's article touches on this.
Brazil is the biggest sugar grower in the world but they've had too much rain and India has been too dry both of which help build a foundation for higher prices per the article. Generally demand seems likely to increase. Along with improved diets in emerging countries people will be eating dessert.
Sugar is one of the four components of the PowerShares Agriculture Fund (DBA), a client holding, and there is also the iPath Sugar ETN (SGG) for anyone inclined to buy the commodity in a brokerage account. There are also quite a few sugar stocks around the world as well. The article mentions Imperial Sugar (IPSU) which I've never heard of that is trying to get back on track after an explosion at its Georgia plant.
The trade recommendation seems so odd that I'm just going to paste it in so I don't misquote it;
Consider selling January $12.50 puts that were recently bid at $1.30. Normally, we like to limit aggressive, speculative options sales in thinly traded issues to narrow time frames that rarely exceed three months. But we like to sell options with premiums of $1 or greater. To satisfy the premium threshold requires selling January options.
The article in question is the daily Striking Price column so the author knows more than I do options but the idea of selling options to get a $1 premium seems like an odd way to come at it. If you need $1 then why not just look at options on $100 stocks?
Assuming I am missing something this is an example where the information about, in this case, the sugar market is useful (there are weird things happening in India with sugar all the time) but the suggested trade has no value for me. The point is that there are a lot of articles with useful info but that draw a useless (for you) conclusion. Reading it is still worthwhile.
The image comes from Barry Ritholtz and shows the busiest 25 sea ports in the world. You can click on it to make it bigger. The list is obviously dominated by various ports in Asia. I've written about ports and companies related to the shipping business a couple of times over the years. Things like port companies, container companies and the like are of interest (perhaps just intellectually) because they should capture what is happening on the ground in these places.
The starting point of the thesis is that the the more economic activity going on, the more traffic being handled which means more revenue. The downside is that the companies can be very capital intensive and so have a lot of debt. Textainer (TGH) "engage(s) in the purchase, management, leasing, and resale of a fleet of marine cargo containers worldwide." That means a lot of buying, selling and borrowing. The company has been profitable, pays an enormous dividend but has been wildly volatile, peak to trough it dropped 77% and has about tripled off of its low.
Port of Tauranga (PTAUF) dropped a less aggressive 28% and has come almost all the way back. It has a smaller debt load than TGH and pays a pretty good dividend as well. Unfortunately, as a New Zealand stock, it is probably difficult to trade. I say unfortunately from the stand point of it not being a viable choice, don't read that as I would buy it if it were easier to trade.
As time goes on and I continue to look at these types of stocks it seems that they correlate closely to stock markets and economic cycles. When I first stumbled across the space I had hoped they could somehow have a low correlation which now seems obviously wrong but that is exactly why I talk about watching these things for a long time, a couple of years in some cases, in order to learn about them.
Read more!
Brazil is the biggest sugar grower in the world but they've had too much rain and India has been too dry both of which help build a foundation for higher prices per the article. Generally demand seems likely to increase. Along with improved diets in emerging countries people will be eating dessert.
Sugar is one of the four components of the PowerShares Agriculture Fund (DBA), a client holding, and there is also the iPath Sugar ETN (SGG) for anyone inclined to buy the commodity in a brokerage account. There are also quite a few sugar stocks around the world as well. The article mentions Imperial Sugar (IPSU) which I've never heard of that is trying to get back on track after an explosion at its Georgia plant.
The trade recommendation seems so odd that I'm just going to paste it in so I don't misquote it;
Consider selling January $12.50 puts that were recently bid at $1.30. Normally, we like to limit aggressive, speculative options sales in thinly traded issues to narrow time frames that rarely exceed three months. But we like to sell options with premiums of $1 or greater. To satisfy the premium threshold requires selling January options.
The article in question is the daily Striking Price column so the author knows more than I do options but the idea of selling options to get a $1 premium seems like an odd way to come at it. If you need $1 then why not just look at options on $100 stocks?
Assuming I am missing something this is an example where the information about, in this case, the sugar market is useful (there are weird things happening in India with sugar all the time) but the suggested trade has no value for me. The point is that there are a lot of articles with useful info but that draw a useless (for you) conclusion. Reading it is still worthwhile.
The image comes from Barry Ritholtz and shows the busiest 25 sea ports in the world. You can click on it to make it bigger. The list is obviously dominated by various ports in Asia. I've written about ports and companies related to the shipping business a couple of times over the years. Things like port companies, container companies and the like are of interest (perhaps just intellectually) because they should capture what is happening on the ground in these places.The starting point of the thesis is that the the more economic activity going on, the more traffic being handled which means more revenue. The downside is that the companies can be very capital intensive and so have a lot of debt. Textainer (TGH) "engage(s) in the purchase, management, leasing, and resale of a fleet of marine cargo containers worldwide." That means a lot of buying, selling and borrowing. The company has been profitable, pays an enormous dividend but has been wildly volatile, peak to trough it dropped 77% and has about tripled off of its low.
Port of Tauranga (PTAUF) dropped a less aggressive 28% and has come almost all the way back. It has a smaller debt load than TGH and pays a pretty good dividend as well. Unfortunately, as a New Zealand stock, it is probably difficult to trade. I say unfortunately from the stand point of it not being a viable choice, don't read that as I would buy it if it were easier to trade.
As time goes on and I continue to look at these types of stocks it seems that they correlate closely to stock markets and economic cycles. When I first stumbled across the space I had hoped they could somehow have a low correlation which now seems obviously wrong but that is exactly why I talk about watching these things for a long time, a couple of years in some cases, in order to learn about them.
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Monday, August 10, 2009
Deep Thoughts by Jack Handey
Motivating today's post is a speech by James Montier about efficient market hypothesis that John Mauldin posted on Barry Ritholtz' site and to a lesser extent some comments left by a reader on Sunday's post. The Montier piece is worth reading but roll up your sleeves and have good cup of mud before you get started it will take a while.
You probably know the joke about the two economists walking down the street and find a $10 bill on the ground and the one economist says the $10 isn't really there, someone would have picked it up by now. The idea being that the market correctly prices in all known information. The thing is, occasionally there is a $10 bill on the ground and someone has to be the first one to find it.
One idea I've tried to convey here is that no approach or method of investing can always be the single best way. Every so often a generally successful strategy will appear to not work very well for a while. With efficient market hypothesis (EMH) this can mean that the collective consciousness that takes stocks up to some highwater mark can turn out to have been incorrect due to things like incorrect expectations, an external shock or something else. Also EMH relies on known information so the market can quickly come to know something new that is important enough to cause a dramatic repricing.
I've never been one to rely on EMH. In past posts I probably said something like the market tends to price in what it knows but occasionally gets things wrong.
The Montier piece gets into all sorts of different pricing models, how people try to apply logic and reason to markets and so on. I've never been a big fan of these because I believe it tends to bog down the process to the point of making it much more complicated than it needs to be, makes it easy to lose the forest for the trees with no guarantee of a better result. It seems to me that people who do bog down in this stuff tend to miss the big macro events.
Too much attention to rules at the expense of the big picture can lead to less diversification and poorer results (risk adjusted or otherwise). The fact is that very expensive stocks can do fantastically well as can inexpensive value stocks. Often the economic or cyclical backdrop plays a role as to whether now is the time for very expensive or very inexpensive to do better. It would follow that exposure to both would mean you would always have exposure to what was doing better.
Another example that draws some strong opinion, at times it makes sense to sell strength and at other times sell weakness. In May, 2007 Citigroup (C) was trading in the $50s. Coinciding with the peak in October, 2007 Citi went into free fall dropping from $47 down to $30 on November 26. Anyone selling on that day at $30 would have seen it go back up to $35 by December 11 but given what happened could we really say a sale on weakness at $30 was bad?
In May 2008 I put up a post about selling some of our position in Statoil (STO) because it had rocketed so far so fast. I sold strength. The sale itself was quite lucky but reducing exposure to something that goes up 48% in two months (as was the case with STO back then) is not the single stupidest thing you will ever do. Back to EMH, how can a stock go up that much in two months?
If nothing can always be the best then it makes sense to consider multiple tactics in the portfolio. This makes the most sense to me.
The reader comment in question says that buy and hold simply works the best but that people should have no more than 50% in equities. I am not a believer in broad proclamations about what other people should do.
He also goes on to say that you cannot expect advisors to outperform the market. I believe the reader has the wrong focus. People need to have enough money for when the time comes. That may or may not mean outperforming the market. If a 50 year old needs $25,000 a year to live on, has $1 million in the bank and is saving $20,000 per year how much do they need to beat the market by? Conversely, another 50 year old who needs $40,000 to live on, with $400,000 saved and putting away $10,000 has more of a need to try to beat the market.
A big thing I focus on is trying to avoid the full brunt of down a lot. When this is done successfully it does a couple of different things. It reduces the chance for succumbing to emotion with panic selling and it also can reduce the consequence of having to pay for an emergency at a bad time in the market cycle. Obviously trying to avoid down a lot is an active approach. This is a value that anyone can add with proper research.
Getting what is right for you boils down to proper asset allocation and a correct assessment of volatility tolerance. Anyone can do this themselves or with the help of some type of planner. Of course this can also be done incorrectly either by a do-it-yourselfer or by some type of planner.
Tonight ESPN will be showing a two hour documentary called The Lost Son of Havana after the Red Sox Tigers game about Luis Tiant's trip home to Cuba a couple of years ago.
Read more!
Sunday, August 09, 2009
Sunday Morning Coffee
Long time readers will know I am a huge sports fan (pretty much anything but golf, NASCAR and events where people are dancing around one way or another). Yesterday David Ortiz held a press conference with union attorney Michael Weiner about the fact the Ortiz' name was on the list of 104 players who tested positive for performance enhancing drugs.
We learned from the press conference that 104 isn't really 104, it might only be 83 and actually it might be less than 83 players, it is 83 positives. None of the names on the list should have been leaked and the leaks did not occur until after some sort of raid. The more I listened to the press conference the more fouled up the entire situation is; every aspect of this is a mess.
With no logical connection to baseball a reader left a comment yesterday that struck me as odd. It was constructive but still struck me a little odd but I must concede that the totality of his point was not clear to me. He was replying to comments in this week's video that a closed end fund I owned went down a ton and that I waited for a big retracement before selling it.
The reader said that "this is the sort of thing that slowly changes active traders to passive investors." He also talked about active strategies being less than ideal. He then went on to opine that my comments in the video revealed the cognitive bias known as anchoring.
The first part of the comment is lost on me. Active traders, buy and hold stock pickers and passive indexers all have holdings that "don't work." The notion that a holding not working out would cause someone to change their approach seems unlikely to me. No matter what method you believe in, it cannot be the best 100% of the time. I've mentioned in past posts about having heard stories about all sorts of other RIAs having real problems navigating and surviving the bear market. By all sorts I mean all approaches which includes passive indexers.
One of the big building blocks to what I try to do and write about is that successful navigation of market cycles can come from correctly figuring out what to avoid. As this is one of my biases I conclude that from the hardship others may have faced in this market cycle that avoidance could have helped a lot of these RIAs; avoidance of the financial sector and avoidance of a fully invested portfolio.
I believe my take all along has been picking what is right for you and then sticking with that but trying to learn more as you go. I cannot say passive indexing is wrong but it is wrong for me. The reader can't say active management is universally wrong even if it is wrong for him.
In thinking about anchoring it may be difficult to have the introspection to realize when we may be anchoring to something and whether we may or may not be impeding progress to whatever we are headed towards. Candidly the way I come at my job is to to learn from things like how markets tend to work and incorporate that into a forward looking analysis. From where I sit there are certain truism that tend to hold up cycle after cycle even if not 100% of the time.
Here again the focus probably needs to be what works best for you. If the flip side to any sort of bias is to be passively indexed into the market, well that is right for plenty of people but not everyone.
Read more!
We learned from the press conference that 104 isn't really 104, it might only be 83 and actually it might be less than 83 players, it is 83 positives. None of the names on the list should have been leaked and the leaks did not occur until after some sort of raid. The more I listened to the press conference the more fouled up the entire situation is; every aspect of this is a mess.
With no logical connection to baseball a reader left a comment yesterday that struck me as odd. It was constructive but still struck me a little odd but I must concede that the totality of his point was not clear to me. He was replying to comments in this week's video that a closed end fund I owned went down a ton and that I waited for a big retracement before selling it.
The reader said that "this is the sort of thing that slowly changes active traders to passive investors." He also talked about active strategies being less than ideal. He then went on to opine that my comments in the video revealed the cognitive bias known as anchoring.The first part of the comment is lost on me. Active traders, buy and hold stock pickers and passive indexers all have holdings that "don't work." The notion that a holding not working out would cause someone to change their approach seems unlikely to me. No matter what method you believe in, it cannot be the best 100% of the time. I've mentioned in past posts about having heard stories about all sorts of other RIAs having real problems navigating and surviving the bear market. By all sorts I mean all approaches which includes passive indexers.
One of the big building blocks to what I try to do and write about is that successful navigation of market cycles can come from correctly figuring out what to avoid. As this is one of my biases I conclude that from the hardship others may have faced in this market cycle that avoidance could have helped a lot of these RIAs; avoidance of the financial sector and avoidance of a fully invested portfolio.
I believe my take all along has been picking what is right for you and then sticking with that but trying to learn more as you go. I cannot say passive indexing is wrong but it is wrong for me. The reader can't say active management is universally wrong even if it is wrong for him.
In thinking about anchoring it may be difficult to have the introspection to realize when we may be anchoring to something and whether we may or may not be impeding progress to whatever we are headed towards. Candidly the way I come at my job is to to learn from things like how markets tend to work and incorporate that into a forward looking analysis. From where I sit there are certain truism that tend to hold up cycle after cycle even if not 100% of the time.
Here again the focus probably needs to be what works best for you. If the flip side to any sort of bias is to be passively indexed into the market, well that is right for plenty of people but not everyone.
Read more!
Saturday, August 08, 2009
Friday, August 07, 2009
Fixed Income Construction
I saw something somewhere early yesterday before heading down to Phoenix that the Treasury is going to be issuing a greater percentage of TIPS for its borrowing needs. Apologies, I do not have a link so I am not sure when this will start but it is not crucial for this post.
Inflation protected securities, accessed one way or another, have a lot of utility because inflation is the biggest threat to regular bonds (and notes to a lesser extent). The biggest downside to TIPS is that the yield is lower than on conventional paper.
If we are indeed headed toward higher price inflation than we have been used to for last decade or two then having more TIPS exposure certainly is compelling. This may however leave a hole in the income stream of people living off their investments. If regular treasuries become less compelling in favor of TIPS then this would seem to imply that there must be a higher yield generated in the rest of the bond portfolio.
I don't think that is the best way to look at it. A better way, if you don't already do this, is to view the income stream as coming from the entire portfolio which includes interest, dividends and the occasional (or frequent) trade that gets done. Someone with a $1 million portfolio pulling out $40,000 per year (4% withdrawal rate) won't have to do that much work to create the income stream. With a 65/35 mix assuming an average 3% yield on the fixed income and a 2% dividend yield on the equities is more than halfway home with $23,500 right there. If we assume zero price appreciation from the fixed income then the remaining $16,500 needed to get to $40,000 has to come from equity price appreciation. Doing the math the person needs to only average 2.5% price appreciation to work out shorter term.
Longer term you would need to average more than that to account for inflation.
In getting to that 3% yield which sounds a little high these days unless you go way out in maturity which is a bad idea IMO, you would need to be a little innovative. If $350,000 is targeted for fixed income then the interest hoped for would be $10,500. Putting 5% into a couple of different higher yielding closed end funds might bring in $1575 per year (assumes a 9% yield which is realistic for the type of fund I mean). That means the other $332,500 has to produce $8925 or 2.68%
Another 15% could be put into investment grade corporates of intermediate maturity (5-6 years) with yields available in the high 3%. $52,500 with an average yield of 3.8% produces another $1995 leaving $6930 to be generated from the remaining $280,000 so it needs to yield 2.475%. From there some foreign could be added and maybe one or two other things in similarly small doses such that a lot could be allocated to TIPS if need be. The idea being that all of these other things have risk but it does not require owning a lot of the riskier fixed income segments to construct a reasonable fixed income stream.
There has been one reader who says a 4% withdrawal rate is too risky. If you agree then you obviously would need to plan accordingly in terms of savings and portfolio construction. One final point to make is that with yields in general so low these it makes most fixed income products unattractively priced. I see no urgency to implement a full fixed income portfolio right here. The numbers in this post are an example only.
Read more!
Inflation protected securities, accessed one way or another, have a lot of utility because inflation is the biggest threat to regular bonds (and notes to a lesser extent). The biggest downside to TIPS is that the yield is lower than on conventional paper.
If we are indeed headed toward higher price inflation than we have been used to for last decade or two then having more TIPS exposure certainly is compelling. This may however leave a hole in the income stream of people living off their investments. If regular treasuries become less compelling in favor of TIPS then this would seem to imply that there must be a higher yield generated in the rest of the bond portfolio.
I don't think that is the best way to look at it. A better way, if you don't already do this, is to view the income stream as coming from the entire portfolio which includes interest, dividends and the occasional (or frequent) trade that gets done. Someone with a $1 million portfolio pulling out $40,000 per year (4% withdrawal rate) won't have to do that much work to create the income stream. With a 65/35 mix assuming an average 3% yield on the fixed income and a 2% dividend yield on the equities is more than halfway home with $23,500 right there. If we assume zero price appreciation from the fixed income then the remaining $16,500 needed to get to $40,000 has to come from equity price appreciation. Doing the math the person needs to only average 2.5% price appreciation to work out shorter term.
Longer term you would need to average more than that to account for inflation.
In getting to that 3% yield which sounds a little high these days unless you go way out in maturity which is a bad idea IMO, you would need to be a little innovative. If $350,000 is targeted for fixed income then the interest hoped for would be $10,500. Putting 5% into a couple of different higher yielding closed end funds might bring in $1575 per year (assumes a 9% yield which is realistic for the type of fund I mean). That means the other $332,500 has to produce $8925 or 2.68%
Another 15% could be put into investment grade corporates of intermediate maturity (5-6 years) with yields available in the high 3%. $52,500 with an average yield of 3.8% produces another $1995 leaving $6930 to be generated from the remaining $280,000 so it needs to yield 2.475%. From there some foreign could be added and maybe one or two other things in similarly small doses such that a lot could be allocated to TIPS if need be. The idea being that all of these other things have risk but it does not require owning a lot of the riskier fixed income segments to construct a reasonable fixed income stream.
There has been one reader who says a 4% withdrawal rate is too risky. If you agree then you obviously would need to plan accordingly in terms of savings and portfolio construction. One final point to make is that with yields in general so low these it makes most fixed income products unattractively priced. I see no urgency to implement a full fixed income portfolio right here. The numbers in this post are an example only.
Read more!
Thursday, August 06, 2009
Theme Of The Week
In the last few days I've written several posts/articles about China in various places. There has also been a lot of commentary elsewhere in the last few days asking all sorts of reasonable questions about lending, the veracity of the the growth statistics and more general questions about whether steps take in terms of stimulus will foster more "bubbles."
In a recent commentary going around from Andy Xie, you can get some of his points here, he sees a sort of ebb and flow leading to a "collapse like the 1990s Asian crisis. But Xie sees this as a risk for 2012."
I've written countless times about wanting to have exposure where it appears that money must be spent. This includes all sorts of infrastructure stocks, energy stocks, telecom and probably some materials names. More important than that I think is that financials are exactly the wrong place to be. Going with this thought ETFs like FXI, GXC and EWH should be avoided. Interestingly the PowerShares Golden Dragon Halter ETF (PGJ) is currently very light on financials but the mix here changes such that anyone buying that fund needs to keep close tabs. The Claymore China Small Cap ETF (HAO) has a high teen allocation to financials so I would stay away from that.
There are plenty of specialty funds with decent China exposure and most of the EG Shares Emerging Market Sector funds will be heavy in China for anyone comfortable investing at the sector level.
I'm not real concerned with trying to predict something with Chinese banks or insurers as opposed to just trying to avoid something. The financial sector appears to be the weakest link in the chain by far and I would simply rather not have to worry about being right about some bank I might buy. Compare that to the fact that we know the water is bad, we know the air is bad, we know that improving the roads and rails makes the country a lot smaller which broadens the manufacturing base which brings a higher living standards and all that entails to the poorer parts of the country out west. Not that these things could not go down a lot because they could but if they went down a lot I would have much more confidence about them coming back.
Short post, off to the office in Phoenix for the day.
Read more!
In a recent commentary going around from Andy Xie, you can get some of his points here, he sees a sort of ebb and flow leading to a "collapse like the 1990s Asian crisis. But Xie sees this as a risk for 2012."
I've written countless times about wanting to have exposure where it appears that money must be spent. This includes all sorts of infrastructure stocks, energy stocks, telecom and probably some materials names. More important than that I think is that financials are exactly the wrong place to be. Going with this thought ETFs like FXI, GXC and EWH should be avoided. Interestingly the PowerShares Golden Dragon Halter ETF (PGJ) is currently very light on financials but the mix here changes such that anyone buying that fund needs to keep close tabs. The Claymore China Small Cap ETF (HAO) has a high teen allocation to financials so I would stay away from that.
There are plenty of specialty funds with decent China exposure and most of the EG Shares Emerging Market Sector funds will be heavy in China for anyone comfortable investing at the sector level.
I'm not real concerned with trying to predict something with Chinese banks or insurers as opposed to just trying to avoid something. The financial sector appears to be the weakest link in the chain by far and I would simply rather not have to worry about being right about some bank I might buy. Compare that to the fact that we know the water is bad, we know the air is bad, we know that improving the roads and rails makes the country a lot smaller which broadens the manufacturing base which brings a higher living standards and all that entails to the poorer parts of the country out west. Not that these things could not go down a lot because they could but if they went down a lot I would have much more confidence about them coming back.
Short post, off to the office in Phoenix for the day.
Read more!
Wednesday, August 05, 2009
Interesting Emotion
This week's update from John Hussman struck me as unusual. He seemed to be expressing a fair bit of frustration over how much the market has gone up in the last few months and that their various disciplines and concepts have prevented them from having more net long exposure. So as the S&P 500 as gone up about 50% in the last five months the Hussman Strategic Growth Fund (HSGFX) appears to have only gone up 5%.
Now let me just say that I'm not sure if he really is frustrated or if he is merely being empathetic to shareholders but either way it is reasonable to be a little frustrated being up 5% in an up 50% world but that does not make the fund a bad fund and does not mean holders should sell. Hussman's post was a catalyst for an article for theStreet.com that should run later in the week that was more about the nuts and bolts of this type of fund but for this post I'd like to focus on the emotional response of frustration.
During the worst of the bear market there were comments from readers expressing interest in putting huge allocations to funds like Hussman's or one that I own and have written about the Rydex Managed Futures Fund (RYMFX) and my replies were along the lines of I love these funds in small does but they will get left way behind if the market goes up a lot.
That is just how the funds work and anyone buying in who is shocked that a low octane absolute return fund lagged a huge rally probably did not understand the product.
If you bought an absolute return fund with proper expectations and the fund you chose has turned out to be much less volatile than the broad market then it would seem to me that it is doing exactly what you would have hoped for when you bought it. One or two funds like this combined with a couple of emerging market stocks or funds that are up close to the 80% that the iShares Emerging Markets ETF is up would help create a pretty good risk adjusted return for your portfolio.
Here is a crazy example that assumes that the Hussman fund charted will continue to have very low volatility. Since the March low the S&P 500 is up 50%. The Hussman fund is up 5% and the iShares Brazil ETF (EWZ) is up a little over 80%. Half the portfolio put into each would have resulted in the portfolio going up 42.5% in an up 50% world with only half the portfolio exposed to historically volatile assets.
The purpose for that example is to (hopefully) show that the result from the fund is too simplistic to say the fund did well or did poorly or that it should or should not be kept. The fund is behaving as I would expect it to and integrated properly into a portfolio it can deliver a useful result. If in the example above Brazil had dropped 30% then the portfolio would have been down 12.5%.
In the type of portfolio construction I write about, and implement, every holding serves a purpose along these lines. The other day I talked about swapping a lower vol name for a higher vol name as a way to increase exposure. When I added the Rydex fund a long ways back it was to reduce volatility. I imagine that had it been the Hussman fund instead it would have had a similar effect and I would have been just as happy with that fund as I am with the Rydex fund.
Read more!
Now let me just say that I'm not sure if he really is frustrated or if he is merely being empathetic to shareholders but either way it is reasonable to be a little frustrated being up 5% in an up 50% world but that does not make the fund a bad fund and does not mean holders should sell. Hussman's post was a catalyst for an article for theStreet.com that should run later in the week that was more about the nuts and bolts of this type of fund but for this post I'd like to focus on the emotional response of frustration.
During the worst of the bear market there were comments from readers expressing interest in putting huge allocations to funds like Hussman's or one that I own and have written about the Rydex Managed Futures Fund (RYMFX) and my replies were along the lines of I love these funds in small does but they will get left way behind if the market goes up a lot.
That is just how the funds work and anyone buying in who is shocked that a low octane absolute return fund lagged a huge rally probably did not understand the product.If you bought an absolute return fund with proper expectations and the fund you chose has turned out to be much less volatile than the broad market then it would seem to me that it is doing exactly what you would have hoped for when you bought it. One or two funds like this combined with a couple of emerging market stocks or funds that are up close to the 80% that the iShares Emerging Markets ETF is up would help create a pretty good risk adjusted return for your portfolio.
Here is a crazy example that assumes that the Hussman fund charted will continue to have very low volatility. Since the March low the S&P 500 is up 50%. The Hussman fund is up 5% and the iShares Brazil ETF (EWZ) is up a little over 80%. Half the portfolio put into each would have resulted in the portfolio going up 42.5% in an up 50% world with only half the portfolio exposed to historically volatile assets.
The purpose for that example is to (hopefully) show that the result from the fund is too simplistic to say the fund did well or did poorly or that it should or should not be kept. The fund is behaving as I would expect it to and integrated properly into a portfolio it can deliver a useful result. If in the example above Brazil had dropped 30% then the portfolio would have been down 12.5%.
In the type of portfolio construction I write about, and implement, every holding serves a purpose along these lines. The other day I talked about swapping a lower vol name for a higher vol name as a way to increase exposure. When I added the Rydex fund a long ways back it was to reduce volatility. I imagine that had it been the Hussman fund instead it would have had a similar effect and I would have been just as happy with that fund as I am with the Rydex fund.
Read more!
Tuesday, August 04, 2009
Looking Good Winthorpe
And the market is clearly feeling good Billy Ray.
As you have heard 100 times since mid day yesterday the S&P 500 is back above 1000 and up 50% from the March low. If you have had any equity exposure through this, either by virtue of not panic selling or buying into the panic your account value is likely much higher that it was five months ago and all of the bull/bear debating in the world doesn't change that.
This is either a normal sized feel good rally for this type of event or a real bull market started. Regardless of the arguments on either side no one knows. There is plenty of opinion to be sure but no certainty. Any sense of relief anyone might feel should be recognized as an emotion. People have emotional reactions, that is not what hurts people. The danger is in how people react to those emotions.
Go back to what you were thinking back at the lows. Back then and a couple of times on either side of the lows I made comments about the lows not being the time to give up on stocks. There would come a time where they would go back to their highs and that based on normal market history a big snapback after the panic, not necessarily going to the old high right away, could be on the way and at that time, anyone wanting to start swearing off stocks could start to reduce.
I have been saying all the way along that stocks were not permanently broken but it is clear that many people learned the hard way that they had the wrong investment plan with too much exposure to volatile assets or perhaps the wrong (for them) strategy to navigate the types of cycles that volatile assets go through.
For all the people who said to themselves if it only gets back to... well up 50% might be a place for people who really think getting out of stocks forever is a good idea to start getting out. One thing is certain, whatever stress, fear, angst or whatever that you felt at the bottom that made you want to swear stocks off; you will feel that again at some point in your life. People in this category need to look hard at themselves in the mirror and come to grips with how bad was it really and whether getting out of stocks forever really is the right thing to do. If these folks can come to realize what a bad idea that is likely to be then hopefully they can figure out how to better manage volatility and their own emotion so that they don't make themselves miserable and don't sabotage their financial plan by panicking out as some people did at SPX 700.
I will repeat that stocks are not permanently broken, the US is not permanently broken, sometimes huge volatility goes with the territory but there are probably better opportunities in equities from other countries.
A quick fire department story. We had a medical call yesterday that involved rock climbing. Some big boulders are not big enough to climb on meaning they can roll out from under you.
Read more!
As you have heard 100 times since mid day yesterday the S&P 500 is back above 1000 and up 50% from the March low. If you have had any equity exposure through this, either by virtue of not panic selling or buying into the panic your account value is likely much higher that it was five months ago and all of the bull/bear debating in the world doesn't change that.
This is either a normal sized feel good rally for this type of event or a real bull market started. Regardless of the arguments on either side no one knows. There is plenty of opinion to be sure but no certainty. Any sense of relief anyone might feel should be recognized as an emotion. People have emotional reactions, that is not what hurts people. The danger is in how people react to those emotions.
Go back to what you were thinking back at the lows. Back then and a couple of times on either side of the lows I made comments about the lows not being the time to give up on stocks. There would come a time where they would go back to their highs and that based on normal market history a big snapback after the panic, not necessarily going to the old high right away, could be on the way and at that time, anyone wanting to start swearing off stocks could start to reduce.
I have been saying all the way along that stocks were not permanently broken but it is clear that many people learned the hard way that they had the wrong investment plan with too much exposure to volatile assets or perhaps the wrong (for them) strategy to navigate the types of cycles that volatile assets go through.
For all the people who said to themselves if it only gets back to... well up 50% might be a place for people who really think getting out of stocks forever is a good idea to start getting out. One thing is certain, whatever stress, fear, angst or whatever that you felt at the bottom that made you want to swear stocks off; you will feel that again at some point in your life. People in this category need to look hard at themselves in the mirror and come to grips with how bad was it really and whether getting out of stocks forever really is the right thing to do. If these folks can come to realize what a bad idea that is likely to be then hopefully they can figure out how to better manage volatility and their own emotion so that they don't make themselves miserable and don't sabotage their financial plan by panicking out as some people did at SPX 700.
I will repeat that stocks are not permanently broken, the US is not permanently broken, sometimes huge volatility goes with the territory but there are probably better opportunities in equities from other countries.
A quick fire department story. We had a medical call yesterday that involved rock climbing. Some big boulders are not big enough to climb on meaning they can roll out from under you.
Read more!
Monday, August 03, 2009
More Investment Choices
Last week for theStreet.com I wrote an article about investing in China via ETFs or stocks and the heavy weighting in financial stocks that some of the China funds have. A reader asked me about using iShares Hong Kong (EWH) as a proxy for China. So yesterday I wrote a follow up article about EWH that might run on Tuesday.
In looking under the hood and seeing that Hong Kong Exchanges is one of the larger holdings in the fund (not a new development) I went to Yahoo Finance to see how that stock has done versus EWH (I did this for most of the larger stocks in the fund), you can see the chart below, and I was surprised to see that in the last few months an ADR for the stock was listed with symbol HKXCY.
A week or two ago Bespoke Investment Group put out a list of all of the NYSE and Nasdaq Chinese stocks but for some reason excluded the pink sheet ADRs and ordinaries. There were over 100 stocks on the NYSE and Nasdaq. Pink sheet ADRs are pretty easy to quote and easy to trade. The ordinaries are more difficult to quote and as far as trading it depends on your brokerage firm.
Schwab is ridiculously expensive because they won't let them be traded over the web. The reps will talk about better execution which of course cannot be true every time and there is no way to know whether a given trade would have worked out the same or better done electronically. I do know that (HOPEFULLY SOMEONE FROM SCHWAB SEES THIS) my clients will never know whether you got them good execution or not but they will see the $100, or more, commission versus the $9.95 or $12.95 they would otherwise pay.
Back to HKXCY. My thesis is that Hong Kong is not a proxy for China but Hong Kong does have a couple of things going for it. It is a financial hub and that role will become larger especially if China goes in the direction so many people think it will. Part of the development of China is in the financial system. This means more stock listing both in China with dual listings in HK. I would there would be more growth in cross listings from other exchanges in the region.
The downside for Hong Kong includes the 7% GDP growth expectations combined with pegging the HKD to the US dollar which stands to be inflationary at some point.
HK Exchanges seems very committed to the dividend. It pays twice a year and based on price of the common on the pay date for its final dividend for 2008 it yields a little over 4% but it needs to be stressed that the dividend history has been quite lumpy and if the company earns less one year they will pay less. Trading volume for Q1 2009 was way down versus Q1 2008 which can't be a surprise but the company was still profitable.
The company appears to have HK$5.5 per share in cash versus a stock price of HK$146. The company does not appear to have any long term debt just liabilities for running the business such as accounts payable and margin deposits and all sorts of employee liabilities like deferred comp. The PE is 36 and ROE is 47.
The numbers come from the company's web site and BusinessWeek, anyone interested in this stock should look for themselves as I could be wrong about any of this and I did not take the time to try to figure out the problems, if any, the company could have from its derivatives business.
For now the stock is expensive and up a lot but the long term prospects for the company are interesting and it would seem not to be a proxy for HK real estate. I could probably make a similar argument for Singapore Exchange as well which appears to have symbol SPXCF. Pinksheet.com has SPXCY as an ADR symbol but there is no volume so I don't know if it is accurate.
For all the talk about finding ways to buy into foreign markets it has to start somewhere. Stumbling across a stock and spending a half an hour trying to get an initial size up is probably where the process starts.
Read more!
In looking under the hood and seeing that Hong Kong Exchanges is one of the larger holdings in the fund (not a new development) I went to Yahoo Finance to see how that stock has done versus EWH (I did this for most of the larger stocks in the fund), you can see the chart below, and I was surprised to see that in the last few months an ADR for the stock was listed with symbol HKXCY.
A week or two ago Bespoke Investment Group put out a list of all of the NYSE and Nasdaq Chinese stocks but for some reason excluded the pink sheet ADRs and ordinaries. There were over 100 stocks on the NYSE and Nasdaq. Pink sheet ADRs are pretty easy to quote and easy to trade. The ordinaries are more difficult to quote and as far as trading it depends on your brokerage firm.
Schwab is ridiculously expensive because they won't let them be traded over the web. The reps will talk about better execution which of course cannot be true every time and there is no way to know whether a given trade would have worked out the same or better done electronically. I do know that (HOPEFULLY SOMEONE FROM SCHWAB SEES THIS) my clients will never know whether you got them good execution or not but they will see the $100, or more, commission versus the $9.95 or $12.95 they would otherwise pay.
Back to HKXCY. My thesis is that Hong Kong is not a proxy for China but Hong Kong does have a couple of things going for it. It is a financial hub and that role will become larger especially if China goes in the direction so many people think it will. Part of the development of China is in the financial system. This means more stock listing both in China with dual listings in HK. I would there would be more growth in cross listings from other exchanges in the region.
The downside for Hong Kong includes the 7% GDP growth expectations combined with pegging the HKD to the US dollar which stands to be inflationary at some point.
HK Exchanges seems very committed to the dividend. It pays twice a year and based on price of the common on the pay date for its final dividend for 2008 it yields a little over 4% but it needs to be stressed that the dividend history has been quite lumpy and if the company earns less one year they will pay less. Trading volume for Q1 2009 was way down versus Q1 2008 which can't be a surprise but the company was still profitable.
The company appears to have HK$5.5 per share in cash versus a stock price of HK$146. The company does not appear to have any long term debt just liabilities for running the business such as accounts payable and margin deposits and all sorts of employee liabilities like deferred comp. The PE is 36 and ROE is 47.
The numbers come from the company's web site and BusinessWeek, anyone interested in this stock should look for themselves as I could be wrong about any of this and I did not take the time to try to figure out the problems, if any, the company could have from its derivatives business.
For now the stock is expensive and up a lot but the long term prospects for the company are interesting and it would seem not to be a proxy for HK real estate. I could probably make a similar argument for Singapore Exchange as well which appears to have symbol SPXCF. Pinksheet.com has SPXCY as an ADR symbol but there is no volume so I don't know if it is accurate.
For all the talk about finding ways to buy into foreign markets it has to start somewhere. Stumbling across a stock and spending a half an hour trying to get an initial size up is probably where the process starts.
Read more!
Sunday, August 02, 2009
Sunday Morning Coffee
How about that stock market? It is up 48% off of the low and we are hearing calls for 1060, 1100 and higher. Sweet! Someone on CNBC on Friday noted that the market is 45% (from 666 to 987 I get 48%) and this person asked how much higher can it really go?
A reader noted that I felt a huge rally, really huge, would come but I should note that it came a little over two months after I would have thought and has exceeded any duration I would have thought reasonable. Going up 40-50% is not necessarily shocking only because it has happened before in short violent spurts but in another week the rally (or bull market) will be five months old which seems like a long time for this sort of whatever it is.
For months I felt there would be a big rally (mostly because big feel good rallies occur regularly in scary events) followed by one more scare-the-hell-out-of-them decline. When the SPX was at 900 I probably thought down to 700 would scare some folks. From here maybe 800 would do it. I don't recall trying to guess where it would go down to so much as hope clients would realize what could be in store and thus not panic if it happens. Mental preparation for a big decline is a good way to avoid panic selling.
While I have not changed my mind the scenario could turn out to be wrong. In getting defensive in the portfolio (still am defensive but less so than a year ago) I said I would hope to go down less but that the trade off would be to go up less on the snapback. This of course is another way of saying I'm less volatile than the market which during the bear phase which is not a bad idea.
Personally the last couple of months have been more difficult to figure than most parts of the current cycle. I still have cash and a small double short position. One idea for moving in to equities can be to swap holdings that might be less volatile for ones that might be more volatile keeping the same cash level. So for example someone owning Exxon Mobil (XOM) could sell that to buy something like Murphy Oil (MUR). I don't own either name it is just an example.
That type of swap does a couple of things. XOM has a market cap of $340 billion, Murphy is $11 billion. The average cap size of your portfolio comes down quite a bit, smaller historically does better for most of the cycle starting early on. It only takes a couple of swaps like that to bring the portfolio's market cap way down. The XOM for MUR swap also juices up the beta a little. Yahoo Finance has XOM's beta at 0.41 and MUR at 1.02. I won't vouch for those numbers but if correct then you increase the overall beta a little. If that is not enough juice you could go with Weatherford International (WFT) which has about the same market cap as MUR and a beta of 1.78. WFT is also a name I do not own, this is just an example.
Another type of example along these lines is to swap a narrow ETF for a stock. Typically a stock is more volatile than a related ETF, I say typically.
Hopefully it is clear that if the volatility of the portfolio is increased while keeping the same cash then the portfolio will likely track closer to the market in both directions.
One other point to make is about psychology. There was a period there where a lot of people were convinced that we were going to have a depression as bad if not worse than the one in the 1930s. Not just the financial system was in jeopardy but the American way of day to day living was in for some serious trouble. I tried to convey that it was not as bad as that. Clearly a lot of the details causing the event were different but as I pointed out then and will point out in the next scary event the most extreme outcome is a low probability. People tend to bring more fear than is actually warranted. I'm not saying this hasn't been plenty bad because it has but I would not describe the outcome as a complete tearing of the social fabric.
In that same vein I believe a lot of people are bringing too much faith that it can be over so quickly. Jobs don't appear to be on the path of going positive anytime soon, GDP estimates for when they turn positive appear to be below a level that provides job growth, current equity prices appear to be well ahead of what revenue will be in the next few quarters and if you were afraid of deflation or inflation six months ago I doubt you've changed you're opinion. While things were not as bad as some feared they were/are bad and so believing things are now all better seems unrealistic.
I feel that being in (with some defense) lets you capture at least some of the move up no matter how high it goes. And obviously a moderately effective defense should mean you go down less if a decline starts tomorrow. Being right or should not be the priority. The priority should be reducing the consequence of being wrong.
I did not take that picture. I believe it was in the WSJ quite a few months back.
Read more!
A reader noted that I felt a huge rally, really huge, would come but I should note that it came a little over two months after I would have thought and has exceeded any duration I would have thought reasonable. Going up 40-50% is not necessarily shocking only because it has happened before in short violent spurts but in another week the rally (or bull market) will be five months old which seems like a long time for this sort of whatever it is.
For months I felt there would be a big rally (mostly because big feel good rallies occur regularly in scary events) followed by one more scare-the-hell-out-of-them decline. When the SPX was at 900 I probably thought down to 700 would scare some folks. From here maybe 800 would do it. I don't recall trying to guess where it would go down to so much as hope clients would realize what could be in store and thus not panic if it happens. Mental preparation for a big decline is a good way to avoid panic selling.
While I have not changed my mind the scenario could turn out to be wrong. In getting defensive in the portfolio (still am defensive but less so than a year ago) I said I would hope to go down less but that the trade off would be to go up less on the snapback. This of course is another way of saying I'm less volatile than the market which during the bear phase which is not a bad idea.
Personally the last couple of months have been more difficult to figure than most parts of the current cycle. I still have cash and a small double short position. One idea for moving in to equities can be to swap holdings that might be less volatile for ones that might be more volatile keeping the same cash level. So for example someone owning Exxon Mobil (XOM) could sell that to buy something like Murphy Oil (MUR). I don't own either name it is just an example.
That type of swap does a couple of things. XOM has a market cap of $340 billion, Murphy is $11 billion. The average cap size of your portfolio comes down quite a bit, smaller historically does better for most of the cycle starting early on. It only takes a couple of swaps like that to bring the portfolio's market cap way down. The XOM for MUR swap also juices up the beta a little. Yahoo Finance has XOM's beta at 0.41 and MUR at 1.02. I won't vouch for those numbers but if correct then you increase the overall beta a little. If that is not enough juice you could go with Weatherford International (WFT) which has about the same market cap as MUR and a beta of 1.78. WFT is also a name I do not own, this is just an example.
Another type of example along these lines is to swap a narrow ETF for a stock. Typically a stock is more volatile than a related ETF, I say typically.
Hopefully it is clear that if the volatility of the portfolio is increased while keeping the same cash then the portfolio will likely track closer to the market in both directions.
One other point to make is about psychology. There was a period there where a lot of people were convinced that we were going to have a depression as bad if not worse than the one in the 1930s. Not just the financial system was in jeopardy but the American way of day to day living was in for some serious trouble. I tried to convey that it was not as bad as that. Clearly a lot of the details causing the event were different but as I pointed out then and will point out in the next scary event the most extreme outcome is a low probability. People tend to bring more fear than is actually warranted. I'm not saying this hasn't been plenty bad because it has but I would not describe the outcome as a complete tearing of the social fabric.
In that same vein I believe a lot of people are bringing too much faith that it can be over so quickly. Jobs don't appear to be on the path of going positive anytime soon, GDP estimates for when they turn positive appear to be below a level that provides job growth, current equity prices appear to be well ahead of what revenue will be in the next few quarters and if you were afraid of deflation or inflation six months ago I doubt you've changed you're opinion. While things were not as bad as some feared they were/are bad and so believing things are now all better seems unrealistic.
I feel that being in (with some defense) lets you capture at least some of the move up no matter how high it goes. And obviously a moderately effective defense should mean you go down less if a decline starts tomorrow. Being right or should not be the priority. The priority should be reducing the consequence of being wrong.
I did not take that picture. I believe it was in the WSJ quite a few months back.
Read more!
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