Archive for November, 2010

Black Friday

I hope everyone had a nice Thanksgiving and plenty to be thankful for. As some of you know, my wife is Australian. She likes Thanksgiving because it involves huge quantities of food (all Australian celebrations start from this point as well). However, she remains suspicious to this day about the lack of Thanksgiving presents. Many friends and family members have tried to convince her over the years that presents are not exchanged on Thanksgiving but she remains skeptical.

The markets were in a pretty foul (or is that fowl) mood on Friday, despite initial indications that the 88% of the people who are employed in the US are actually shopping in line with expectations. The real news is that things are coming unglued in Korea and Europe and that has taken some of the enthusiasm out of the “risk trade”.

Although it is inexcusable to shell civilians these days, I suspect that the Korean issues will be largely forgotten in a few weeks. The North Koreans are certainly trying to send some sort of message. But if neither the Chinese, who provide the lion’s share of economic support, nor the South Koreans, who bear the brunt of any miscalculations, can figure out what that message is, the markets are unlikely to dwell upon it for any great length of time. Sadly, nothing has changed in Korea except for those who had the misfortune of being on the wrong island at the wrong time.

The bigger issue is in Europe where the sovereign debt wound has reopened near the heart of the financial system. The patient is not well. Although the press and financial officials have gone to great lengths to concentrate attention on the failings of governments in Ireland, Portugal and Spain, the real problem is the health of Europe’s largest commercial banks, who bought up all these IOUs when they were supposed to be nearly as good as German Bunds. Who’s to blame? It depends on how far one wants to go back. I am sure there is someone in Brussels who can lay this all at the feet of the first Holy Roman Emperor.

Exposure of EU Banks
From: John Mauldin’s Frontline Thoughts Newsletter

Europe’s banks are going to take a long time to work through this load of debt. And these figures do not include the assets on the insurance company books which, in the light of new regulations being proposed, could prove to be another source of pressure. Spain, which has an economy the size of Ireland, Portugal and Greece combined, is the one that has everyone worried. The good news for investors is that the ECB is not going to let the European banking system sink beneath the waves. The bad news is that the bailouts and subsidies will be a long term drag on the European economy which, taken as a whole, is slightly bigger than the US economy.

So, with just over half the world’s GDP tied up in systems (US and EU) with banks that are not making fresh loans to spur growth, we are still not out of the woods yet. Recoveries from financial crises take longer and are slower than the regular manufacturing/inventory type. The reasons are covered in depth in the book “This Time Is Different” (but it is not an “easy read”).

So where does the System tell us to focus?

In our international mutual fund section, it still recommends India, Metals and Emerging Markets. From our ETF portfolios, Silver, Emerging Markets and Soft Commodities are still hanging in at the top of the tables despite a pullback over the last two weeks. In US domestic sectors, Materials and Consumer Discretionary are still strong although it should be noted that Energy has started to make a move upwards in the rankings. This is shadowed by an improvement in the readings for UGA on our shorter term commodity ETF portfolio where Gasoline has moved into the #2 spot behind Silver.

Switching from EPI to DBA

Ranking for SA Portfolio

In this week’s Seeking Alpha blog, we go through the switching mechanism as DBA has replaced EPI in the top 3 on Friday’s reading.

We delve into some of the reasoning behind separating the Asset Selection (Research) part of the process from the Trading (Ranking and Switching) part.

Despite getting off to a rocky down 7% start (we should have waited a few weeks for “January Effect”, oh well) we still think that removing emotions from our investing is the key to achieving good compoundable returns without adding anymore stress to our lives.

Commission Free ETFs!

Everybody loves FREE and transaction costs do matter. Beyond the headlines, can we as investors, make this “special offer” work for us? Four reputable firms have offered ETFs on a commission free basis. We decided to dig beyond the press releases to see which offer worked best with our Investment System.

Our conclusion? More is better. TD Ameritrade’s slate of 101 Commission Free ETFs offers the most promising lineup for our “System.” TD Ameritrade offered a good mix of ETFs from several different sponsors whose ETFs we already buy elsewhere for $8 a trade.

How did we conduct our testing? We built portfolios at Fidelity, Schwab, Vanguard and TD Ameritrade that met our criteria and only used the free ETFs advertized on the websites. In the case of Fidelity and Schwab, we used the whole list. In the case of Vanguard and TD Ameritrade, we picked our favorites.

Fidelity

Fidelity was early in the game, striking a deal with iShares help the latter build some buzz for some of its more generic ETFs. It now offers 25 ETFs on a commission free basis (list here). But, the equity side of its commission free offerings reminded us of the bargain bin. And, when we crunched the numbers, the performance of the assets in our System framework did not change our mind about the “wilted lettuce” on offer. We’ll keep paying $7.95 a pop for the ETFs we want.

Schwab

There was a lot of excitement when Schwab announced it was getting into the ETF business as a part of broader efforts to expand from broker to asset gatherer/money manager. To help promote the concept, Schwab has made all of its in-house ETFs commission free (they already boast very low expense ratios). The problem is that there are only 11 of them (list here) and like Fidelity’s free offerings, the equity funds offer such broad, bland exposure (2000 stocks in some) that it was hard for any of these vehicles to offer standout performance under recent market conditions. For our system we would prefer to have at least 15 funds to work with and to have those assets segmented in a more appropriate fashion. 11 ETFs are just not enough. When we ran our system with these assets, the results were uninspiring. That said, the promotion on the web site suggests that Schwab is offering 250 free trades for new accounts if you buy one of the in-house ETFs. That might be worth looking into.

Vanguard

Having tried out Fidelity’s and Schwab’s free offers, we were keen to see how Vanguard would stack up. Initially, the signs looked good. Vanguard has a broad range of ETFs (48 on this page) and we have had some pretty good success with systems that build on Vanguard’s mutual funds. We picked the following 18 as our portfolio (VCLT, EDV, VGSH, VWO, VGK, VPL, VNQI, VIG, VYM, VFH, VDE, VCR, VAW, VHT, VPU, VIS, VDC, VOX). The results were getting a bit better but still not what we had in mind. When we looked closely at our ETFs, we noticed that their performances were very “index like”. That shouldn’t surprise coming from the company that popularized index investing for individuals. It should be noted, however, that some of the ETFs we looked at were only just a year old (which is not enough price information) so we expect to see improvements the next time we run this test.

TD Ameritrade

By this point, we were wondering whether the whole free ETF wasn’t just a promotion to move the less exciting ETFs off the shelves. Then we went on to the TD Ameritrade site. The 101 ETFs sounded promising (commission free ETF list here) but there are plenty of me-too ETFs in the world. When going through the list, however, we found a pretty good representation of some of our favorite ETFs from a healthy slice of the reputable ETF sponsors out there.

We created a very broad 22 ETF universe which holds 2 ETFs at all times. The long term results were just what we were looking for in a System portfolio. If you are not a Silver or Gold member, the ETFs we chose were (FXI, VWO, TLT, EWA, JNK, DBC, ILF, SHY, VGK, LQD, AAXJ, PCY, DJP, EWX, DBO, RWX, VYM, IWC, GUR, EWC, RSX, EWZ). You can check out their current ratings on the “Steam Gauge.”

So, the clear winner in our little contest is TD Ameritrade. From its slate of commission free ETFs, we could easily find the asset classes we wanted to include in our investment universe. These were ETFs we were paying sub $10 commissions to buy at other places so we did not feel like the list forced us to compromise investment performance to save a few bucks.

Seeking Alpha Portfolio

Week One of the Seeking Alpha Portfolio

On Monday, as threatened in previous posts, I bought enough shares (I already had some) to get my ETF portfolio to 500 shares of EWH (@ 19.63), 370 shares of EPI (@ 26.76) and 130 shares of TUR (@74.87). I paid $7.95 a trade so at Monday closing prices shown in brackets, I was left with my three positions and $526.85 in cash. At the end of a dreary trading week, my portfolio is worth $29,365.55 for a 2.11% loss.

As you can see from the table, the top three remain the same so for this coming Monday. There will be no trades.

In the post this week, I talked about how using an “Investment System” removes a lot of the emotion surrounding investments so that one can get on with the job of managing one’s money. This is a forward test, so it is too early to say whether my “System” will deliver the goods after only one week.

I personally think removing emotion from the investment decision and management process is a good thing. Although it is fun to get swept up in the excitement of the financial markets, I have seen no evidence that emotional, regret seeking habits add to one’s investment performance. I have seen plenty of evidence that relying on your “gut feel” in these markets can do severe physical and emotional damage. So, for me, I prefer to save my emotional energy for other pursuits.

Balance the Budget (if you have a few spare minutes)

The New York Times put out a great interactive feature which lays out many of the budget issues confronting the Federal Government in checklist format. I was able to solve the 2030 budget although I left a bit of a gap still in 2015 with a 85/15 split between cost cuts and tax rises. There is no submit button but exercises like these should eventually help quantify the issues for voters. Hopefully, that will eventually translate into effective policy.

Using the Portfolio Features

We have updated our video on the Portfolio Select/Portfolio Management feature to show you all the new features.

The biggest change is the multiple portfolio function so that you can test out your ideas.

Click the “full screen” icon in the lower right hand of the video control panel if you want to see the details more clearly.

Catalyst Free…for a little while

The markets, like a finely tuned Italian sports car, not only make a lot of noise but need lots of love and attention. They also tend to spend a fair amount of time in the shop costing us money. We certainly saw lots of love and attention in the past few weeks as excitement built ahead of the US mid-term elections and the second round of quantitative easing (QE2).

Now that those events are in the past, the markets are left to digest the cold leftovers (a smaller than expected QE2 and the realization that the same old Congress will be around for a few more weeks). It doesn’t help that the BLS appeared to fiddle with the figures ahead of the last release, resulting in a “positive surprise” that seemed more than a bit empty. If you want to explore BLS figures, I recommend Mr. Mauldin’s column for a first brush and Shadow Government Statistics if you want to get your hands dirty with the details.

The next catalyst, which has a very good chance, is the extension of the Bush Tax Cuts. With State Governments cutting back expenditures, President Obama would only be shooting himself in his “2012 re-election campaign” foot if he were to further tighten fiscally by allowing federal income taxes to rise in the New Year. Will all the “Bush cuts” survive (ie. for those making more than $250k)? That is probably the only drama left in this upcoming catalyst. How long will this one last? Don’t be surprised if we are still talking about it in February.

So, what are the various “Systems” telling us?

From a Global Perspective, there is a preference for India, Metals (both precious, SLV, and industrial) and Emerging Markets. Fixed income, in all its flavors, has fully yielded the field to equities. In the US Sector portfolio, the Materials (XLB), Consumer Discretionary (XLY) and Q’s (QQQQ) are slightly ahead of the pack but with readings that don’t inspire tremendous confidence. On our short term commodity screen, Silver (SLV) has overtaken Sugar (SGG) and US Gasoline (UGA) has put in strong #3 showing which might be worth digging into (as the summer driving season is well past). In other portfolios, we see Non-US Properties (RWX) and Non-Japan Asia (EPP) still showing strength, most likely in expectation of receiving some of those still inflationary QE2 dollars.

Initial Ranking of Seeking Alpha Portfolio

A Portfolio Story

In order to make the Fund King System more accessible, we have started a blog series on the Seeking Alpha website which will track the fortunes of a 20 ETF universe. The portfolio starts with $30,000 and will be buying into the top three ETFs in that system (TUR, EWH and EPI) today. If you want to follow the blog posts, start here. If you want to follow the Seeking Alpha ETF Portfolio System, we have set up a separate page here.

Instructions for Portfolio Select and Portfolio Management

We are putting the finishing touches on the much promised instructions for using our new features. The video should be ready today and we will post the link on the front page, as a separate item on the Facebook page and in the main blog. Thank you for your patience.

A Nostalgic Story about Silver

I have thoroughly enjoyed all the conspiracy theories swirling around Silver, JP Morgan and its biggest ETF, SLV over the last few weeks.

When I was a young runner on Wall Street (back when stocks and bonds were printed on real paper), I took my outstandingly huge wages (I was 14 at the time) and bought shiny one ounce bars of silver for between 6 and 10 bucks a pop at a bullion dealer just off Broadway. I had amassed around 20 to 25 of them by the end of the summer and put them in box at the bottom of my closet. Less than a year later (it might have even been as soon as Thanksgiving vacation), my parents were taking the nice silver out of the drawers and locking it away. The Hunt Brothers had struck, driving silver well past $40 an ounce (and kicking off a rash of burglaries aimed at Grandma’s silver). My Dad gave me a look that said: “Don’t be greedy.” I was nearly mobbed at the bullion dealer on Broadway when I cashed in my small hoard of shiny silver bars. I held on to two or three (and watched them go back to $5 an ounce while they oxidized) but the lesson of “Sell High” stuck. For a while, I was one wealthy teenager!

So, could there be some fun and games going on in the Silver market? I wouldn’t bet against it! A lot of rotten ideas from the 70’s and early 80’s seem to be coming back into fashion. Where did I put those old ties?

An ETF Story

In order to tell our story on Seeking Alpha, we have decided to simply “tell a story”. Since it is a story about an ETF portfolio, we plan to update it once a week with observations and performance statistics.

If you would like to follow along, start here with Chapter 1. Check back on a weekly basis to find out how the story develops. If you want to read the comments on Seeking Alpha, go here.

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