Just watched Jim Cramer's Mad Money. You know, the guy who says "There's always a bull market somewhere." Sorry Jim, you're wrong.
Global equity markets are going down. I've expected this for some time. Just didn't realize how far up they'd rise before then on nothing more than the strength of the Federal Reserve's so called "Quantitative Easing 2" or QE2 program.
Retail investors just aren't getting back in the game. I for one have been taking money gradually out of the market since the beginning of the year. My family's sitting on a cash cushion of about 50%. Not that I'm happy about earning next to nothing in a non-FDIC insured money market fund. But the options of locking away my money at 1% a year in a CD don't offer a viable alternative.
So, I guess you could buy gold, which has started to uncorrelate with the broader stock market. For me that's just too speculative at these levels. Just look what happened to silver prices at the beginning of May.
The only real alternative is to hedge aggressively. As I said, I'm heavy into cash, but also have money in large, mid and small-cap funds as well as international exposure. I like Invesco Dividend Investor (LCEIX) for stability and dividend yield. My mid-cap money is in Scout Mid Cap (UMBMX) and small cap is in Royce Value (RYVFX) - although I'm keeping an eye on Royce since lately they've been underperforming their benchmark.
Hence readers, I'm seeing this shaping up for the future: More wrangling over the debt ceiling, a default in Greek debt, other European debt downgrades, China inflation persisting, U.S. inflation creeping up, no relief on the jobs front, oil prices coming down slightly on weakening demand, the federal reserve weighing another round of easy money and the media being consumed with political rhetoric ahead of next year's election.
Unless Uncle Ben and the Fed step in soon to offer relief or Congress raises the debt ceiling soon, the stock market is heading lower. I'm thinking this second quarter earnings season is going to be a disappointment too. So taking money out of the market now is a safe play.
For me, I'm 50-50. Jim Cramer had one thing right last night. The only way out of this mess is lower stock prices. S&P 1000-1100 is when I see the next bull market.
Saturday, June 4, 2011
Sunday, February 6, 2011
ETFs: The Next Meltdown
My latest rant along time back - Sept. - bashed the U.S. as I endeavored to create a globalized diversified investment strategy to play countries, rather than companies as investments. Trouble was, I focused on using the crazy-popular ETF (exchange traded fund) as my primary investment vehicle. If anyone doesn't believe that ETFs are the only game in town, read this:
Now, the first rule of investing - and an idol of mine Warren Buffet's favorite piece of advice - is invest in what you know. Wall Street has made that much more difficult since they decided to turn away from hiring finance majors, and instead put MIT wizzes to work as "quants" on black box investing strategies. So, being the dutiful investor, I decided to look into exactly how an ETF works. Yes, the industry has done a marvelous job marketing these products and every day there is news about another ETF opening to investors. But how exactly do they work and are ALL my family's assets safe in them?
The more and more I looked into them, the more fearful I became. Here is a product that essentially is an index fund operated by a trustee that purchases shares of equity in that index for its shareholders. Investment banks create initial share of these ETFs as creation units, which are then traded to hedge funds, other institutions and you and I - the retail crowd. What branches off from reality, however, is the fact that these banks can create an UNLIMITED number of these shares to satisfy market demand.
Now, I don't know about you, but in my opinion there can be no market when there exists an infinite amount of anything. This becomes a concern because short sellers - mostly hedge funds - can borrow ETF shares from those that own them and sell them, realizing a profit if they drop in value, but promising to pay them back to the owner if the ETF rises in value. Indeed, the amount of short interest on some of these ETFs is staggering - well in excess of the value of the underlying long holders.
Check this out
This introduces a HUGE counterparty risk to the holders of the ETF. Counterparty risk is the risk that the other player on the trade - in this case the hedge fund - will not be able to make good on their promise to give you the shares back when the ETF rises. Advocates for ETFs say these short players have to post collateral on such trades, but somehow I'm not assuaged by that argument given the recent financial subprime metldown and the fact that not even the smartest brains on Wall Street on in Washington had any idea what a CDO (collateralized mortgaged-backed security) was.
I'm not advocating that there will be a failure of an ETF. That might be the case. What I do know if the "Flash Crash" that occurred 2:45 p.m. May 10, 2010 causing the biggest one-day decline in Dow Jones Industrial Average history was linked to ETFs. By the way, regulators still don't know the exact cause.
There is a general disconnect in basic trade theory that you need a supply and demand for a properly functioning market. The demand is clearly there - $1 trillion in ETFs - the high correlation between ETFs and the overall market, etc. Investment banks and wealth managers are pushing these things are tax-advantaged investments with no more risk than the average index fund. Yet, that is not the case. These are derivative instruments - what Buffet has called "weapons of mass destruction." When you buy an ETF share, you don't own the actual shares of the companies in the index as you would in a traditional mutual fund. You own the right to a creation unit - that remember has an unlimited supply. So skyrocketing demand - unlimited supply. Do you see a problem ahead? I do.
US ETF Assets Hit $1 Trillion Milestone
Now, the first rule of investing - and an idol of mine Warren Buffet's favorite piece of advice - is invest in what you know. Wall Street has made that much more difficult since they decided to turn away from hiring finance majors, and instead put MIT wizzes to work as "quants" on black box investing strategies. So, being the dutiful investor, I decided to look into exactly how an ETF works. Yes, the industry has done a marvelous job marketing these products and every day there is news about another ETF opening to investors. But how exactly do they work and are ALL my family's assets safe in them?
The more and more I looked into them, the more fearful I became. Here is a product that essentially is an index fund operated by a trustee that purchases shares of equity in that index for its shareholders. Investment banks create initial share of these ETFs as creation units, which are then traded to hedge funds, other institutions and you and I - the retail crowd. What branches off from reality, however, is the fact that these banks can create an UNLIMITED number of these shares to satisfy market demand.
Now, I don't know about you, but in my opinion there can be no market when there exists an infinite amount of anything. This becomes a concern because short sellers - mostly hedge funds - can borrow ETF shares from those that own them and sell them, realizing a profit if they drop in value, but promising to pay them back to the owner if the ETF rises in value. Indeed, the amount of short interest on some of these ETFs is staggering - well in excess of the value of the underlying long holders.
Check this out
This introduces a HUGE counterparty risk to the holders of the ETF. Counterparty risk is the risk that the other player on the trade - in this case the hedge fund - will not be able to make good on their promise to give you the shares back when the ETF rises. Advocates for ETFs say these short players have to post collateral on such trades, but somehow I'm not assuaged by that argument given the recent financial subprime metldown and the fact that not even the smartest brains on Wall Street on in Washington had any idea what a CDO (collateralized mortgaged-backed security) was.
I'm not advocating that there will be a failure of an ETF. That might be the case. What I do know if the "Flash Crash" that occurred 2:45 p.m. May 10, 2010 causing the biggest one-day decline in Dow Jones Industrial Average history was linked to ETFs. By the way, regulators still don't know the exact cause.
There is a general disconnect in basic trade theory that you need a supply and demand for a properly functioning market. The demand is clearly there - $1 trillion in ETFs - the high correlation between ETFs and the overall market, etc. Investment banks and wealth managers are pushing these things are tax-advantaged investments with no more risk than the average index fund. Yet, that is not the case. These are derivative instruments - what Buffet has called "weapons of mass destruction." When you buy an ETF share, you don't own the actual shares of the companies in the index as you would in a traditional mutual fund. You own the right to a creation unit - that remember has an unlimited supply. So skyrocketing demand - unlimited supply. Do you see a problem ahead? I do.
Thursday, September 9, 2010
Going Global
Through gritted teeth in my best Dirty Harry voice:
"With the U.S. - the most powerful country on earth - dropping in global competitiveness, you have to ask yourself a question. Do you feel lucky today? Well . . . do ya PUNK!"
US Falls Down Competitive Ladder
I for one am looking for ways to hedge the decline of America and broaden my investment portfolio to incorporate a more global strategy. Most investors have the majority of their retirement savings pinned to the hopes of the homeland for fear of what the rest of the world might be hiding. It's a safe bet, sure enough. There's more transparency of information here, we have a stable government, monetary system and strong property rights.
On the downside however, we have a HUGE deficit, complicated tax code and massive legacy payouts due under social entitlement programs. The US dollar, once the bedrock for international trade and finance, has now come under question to remain the world's currency standard.
In the short-term, I'm extremely cautious with my domestic investments. President Obama has proposed some sensible solutions to get the economy rolling again. We would have been much better served, however, if he did so a year ago and not now when the chances of passage before the mid-term elections are desperate at best. Allowing the write off of investments by corporations and extending research and development tax breaks could, if passed, get the unemployment rate down and revive consumer confidence.
Think of the US like a blue chip stock. Sure you need it in your portfolio. But it's more likely to have enormous contingency issues - lawsuits against it, huge pension liabilities, etc. Growth and opportunities are better abroad.
How To Build A Global Investment Portfolio
I'm still a believer in keeping my cash in dollars with plenty still sitting on the sidelines. But my equity exposure will be by country and not by asset class (i.e. large cap, small cap) or industry (i.e. mining, consumer discretionary). Think of each country like a company and invest in those that are run the best and that offer the best value. For my money, the US is just not one of them.
"With the U.S. - the most powerful country on earth - dropping in global competitiveness, you have to ask yourself a question. Do you feel lucky today? Well . . . do ya PUNK!"
US Falls Down Competitive Ladder
I for one am looking for ways to hedge the decline of America and broaden my investment portfolio to incorporate a more global strategy. Most investors have the majority of their retirement savings pinned to the hopes of the homeland for fear of what the rest of the world might be hiding. It's a safe bet, sure enough. There's more transparency of information here, we have a stable government, monetary system and strong property rights.
On the downside however, we have a HUGE deficit, complicated tax code and massive legacy payouts due under social entitlement programs. The US dollar, once the bedrock for international trade and finance, has now come under question to remain the world's currency standard.
In the short-term, I'm extremely cautious with my domestic investments. President Obama has proposed some sensible solutions to get the economy rolling again. We would have been much better served, however, if he did so a year ago and not now when the chances of passage before the mid-term elections are desperate at best. Allowing the write off of investments by corporations and extending research and development tax breaks could, if passed, get the unemployment rate down and revive consumer confidence.
Think of the US like a blue chip stock. Sure you need it in your portfolio. But it's more likely to have enormous contingency issues - lawsuits against it, huge pension liabilities, etc. Growth and opportunities are better abroad.
How To Build A Global Investment Portfolio
I'm still a believer in keeping my cash in dollars with plenty still sitting on the sidelines. But my equity exposure will be by country and not by asset class (i.e. large cap, small cap) or industry (i.e. mining, consumer discretionary). Think of each country like a company and invest in those that are run the best and that offer the best value. For my money, the US is just not one of them.
Tuesday, August 17, 2010
On The Fulcrum of The Seesaw
I was wrong.
Second quarter earnings did exceed my expectations. I suppose companies were able to squeeze even more from overworked employees and suppliers. Sales, however, continue to look sluggish as evidenced by Wal-mart's disappointing results today. With the future so uncertain, companies will not be hiring, or spending much, any time soon. And the status quo will remain.
Here's two interesting statistics for you: Lottery sales are breaking records and Alcohol sales are breaking records
Put them together and call it the Sin Index. Doesn't make me too hopeful about the future. Probably you too if you haven't been adding any money to equity funds beyond dollar-cost averaging into your 401k plan.
So, what's going to give this market conviction? I predict the mid-term elections in November will bring a HUGE wakeup call to Congress. Long-term incumbents will be swept out like yesterday's garbage. Third-party political candidates will have a very strong showing. A stronger approach to attacking the unemployment problem and keeping the economy from sinking further will be developed. And the market should finish the year stronger. But what will happen until then is anybody's guess. It's as if we're on the fulcrum of the seesaw.
From a valuation perspective, the market is fairly priced from a historic P/E (price-to-earnings) Ratio perspective. But that is based on earnings estimates that are fairly rosy. So here's the rub . . . Either you think that company earnings - and from a broader perspective, the economy - will grow by double digits (11%) or more over the next year, in which case you're in; OR you think growth will remain slower, in which case you're out.
As for me, I see the seesaw tilting toward the slower growth scenario. Thus, my cash position remains quite robust (don't get me started on bonds - that's a market for fools right now). I'm betting on the market to fall another 10% during the third quarter (historically the most volatile - see Black Monday, The Great Crash) before I put more money to work. It 's a fool's game right now. And nobody knows the rules.
Second quarter earnings did exceed my expectations. I suppose companies were able to squeeze even more from overworked employees and suppliers. Sales, however, continue to look sluggish as evidenced by Wal-mart's disappointing results today. With the future so uncertain, companies will not be hiring, or spending much, any time soon. And the status quo will remain.
Here's two interesting statistics for you: Lottery sales are breaking records and Alcohol sales are breaking records
Put them together and call it the Sin Index. Doesn't make me too hopeful about the future. Probably you too if you haven't been adding any money to equity funds beyond dollar-cost averaging into your 401k plan.
So, what's going to give this market conviction? I predict the mid-term elections in November will bring a HUGE wakeup call to Congress. Long-term incumbents will be swept out like yesterday's garbage. Third-party political candidates will have a very strong showing. A stronger approach to attacking the unemployment problem and keeping the economy from sinking further will be developed. And the market should finish the year stronger. But what will happen until then is anybody's guess. It's as if we're on the fulcrum of the seesaw.
From a valuation perspective, the market is fairly priced from a historic P/E (price-to-earnings) Ratio perspective. But that is based on earnings estimates that are fairly rosy. So here's the rub . . . Either you think that company earnings - and from a broader perspective, the economy - will grow by double digits (11%) or more over the next year, in which case you're in; OR you think growth will remain slower, in which case you're out.
As for me, I see the seesaw tilting toward the slower growth scenario. Thus, my cash position remains quite robust (don't get me started on bonds - that's a market for fools right now). I'm betting on the market to fall another 10% during the third quarter (historically the most volatile - see Black Monday, The Great Crash) before I put more money to work. It 's a fool's game right now. And nobody knows the rules.
Sunday, July 11, 2010
Is This The Quarter The Cracks Begin To Show?
Larry Kudlow has it right:
Business-Power Neglect
Stimulus hasn't created jobs. Businesses aren't hiring. Banks aren't lending, which has kept inflation low at the expense of business growth. Congress is gridlocked and awaiting November like tourists on the beaches of the Florida panhandle. And consumers are getting tired. Meanwhile, tax increases are looming next year. And state and local government workers are facing the cold reality that they too may join the unemployment line.
The only way out of this mess is to offer REAL incentives for businesses to hire and allow them to write off capital investments more quickly and take an axe to government spending as Reagan did in the 80s. Drastic action is needed now, but it won't be coming.
Bunker down for a volatile earnings season. There's certain to be some disappointments and cautious outlooks for the remainder of the year. The question is what degree this has been baked into the market. I'm waiting for earnings forecasts to come down again before investing more, which could take us to near 1000 on the S&P.
Business-Power Neglect
Stimulus hasn't created jobs. Businesses aren't hiring. Banks aren't lending, which has kept inflation low at the expense of business growth. Congress is gridlocked and awaiting November like tourists on the beaches of the Florida panhandle. And consumers are getting tired. Meanwhile, tax increases are looming next year. And state and local government workers are facing the cold reality that they too may join the unemployment line.
The only way out of this mess is to offer REAL incentives for businesses to hire and allow them to write off capital investments more quickly and take an axe to government spending as Reagan did in the 80s. Drastic action is needed now, but it won't be coming.
Bunker down for a volatile earnings season. There's certain to be some disappointments and cautious outlooks for the remainder of the year. The question is what degree this has been baked into the market. I'm waiting for earnings forecasts to come down again before investing more, which could take us to near 1000 on the S&P.
Saturday, June 19, 2010
Fear And Loathing In Uncertain Times
The stock market has been behaving like a spoiled child on a sugar-fueled field trip to the toy store. As a parent, it's hard to tell what this brat wants. It's times like these you're faced with two choices - give the kid more candy and ride out their manic energy - or take it away and gird yourself for the onslaught of complaining and unwanted attention from strangers. Regardless of what choice you make, you'll question it.
I've said no to the candy. I won't feed this monster. No sir. Not while it's behaving this way. Perhaps you're in the same boat. 'Retail' investors like us have yet to put money into the stock market. Institutional investors and big bailed-out banks have driven the market with low cost borrowings from Uncle Sam.
Here's one thing I know:
The labor market sucks. I know this from personal experience. When companies are turning down candidates on the basis of being unemployed, you know things are bad.
Out of work applicants need not apply
We're about as unpopular as the referee in the US - Slovinia soccer match.
This brings me to my point. Economic growth requires two things - money and labor. So far companies have been spending little and squeezing every last inch of productivity from their workers. Consumers are getting fatigued. Stimulus is drying up. The housing market is about as stable as BP's leaking oil well. And governments around the world are on the verge of bankruptcy with massive amounts of debt.
US legislators are debating right now whether to continue giving this kid more candy. Feed it some more at least until the mid-term elections in desperate hope that they might still have a job. (I hope they don't)
Like Staff Sgt. Barnes in Platoon, I say it's time to 'TAKE THE PAIN' Half measures like the 'Jobs Bill' or the 'Stimulus Act' are only prolonging the natural economic consequences that our spoiled brat of a financial/regulatory complex has wrought. This market is artificially supported on the basis of the country returning back to average growth. But growth will not come until banks lend more and businesses begin to spend more and hire.
Earnings season is upon us like the approaching tide of oil on the Florida coast and will be met with as much enthusiasm. It's times like these where the only real opportunities are cleaning up other people's messes.
I've said no to the candy. I won't feed this monster. No sir. Not while it's behaving this way. Perhaps you're in the same boat. 'Retail' investors like us have yet to put money into the stock market. Institutional investors and big bailed-out banks have driven the market with low cost borrowings from Uncle Sam.
Here's one thing I know:
The labor market sucks. I know this from personal experience. When companies are turning down candidates on the basis of being unemployed, you know things are bad.
Out of work applicants need not apply
We're about as unpopular as the referee in the US - Slovinia soccer match.
This brings me to my point. Economic growth requires two things - money and labor. So far companies have been spending little and squeezing every last inch of productivity from their workers. Consumers are getting fatigued. Stimulus is drying up. The housing market is about as stable as BP's leaking oil well. And governments around the world are on the verge of bankruptcy with massive amounts of debt.
US legislators are debating right now whether to continue giving this kid more candy. Feed it some more at least until the mid-term elections in desperate hope that they might still have a job. (I hope they don't)
Like Staff Sgt. Barnes in Platoon, I say it's time to 'TAKE THE PAIN' Half measures like the 'Jobs Bill' or the 'Stimulus Act' are only prolonging the natural economic consequences that our spoiled brat of a financial/regulatory complex has wrought. This market is artificially supported on the basis of the country returning back to average growth. But growth will not come until banks lend more and businesses begin to spend more and hire.
Earnings season is upon us like the approaching tide of oil on the Florida coast and will be met with as much enthusiasm. It's times like these where the only real opportunities are cleaning up other people's messes.
Thursday, May 6, 2010
Markets Are Dropping, But Not For The Right Reason
The data I had expected is finally coming out:
Retailers Posting Disappointing Sales In April
Sovereign debt default fears throughout Europe may be driving the recent market "correction." But the real concern to the US economy should be that growth may once again stall and send us into another recession.
Let's look at the facts:
Government spending is drying up:
Since February, I've been warning about a slowdown in consumer spending, which is the primary driver of the US Gross Domestic Product (GDP). I still believe analysts haven't factored this into their predictions for current quarter corporate earnings. I expect earnings disappointments by mid-summer.
Time to stay defensive, with plenty of cash on hand and your equity account stocked with quality dividend paying stocks. My mutual fund choice for long-term holding remains AIM Diversified Dividend Fund, which I own.
Retailers Posting Disappointing Sales In April
Sovereign debt default fears throughout Europe may be driving the recent market "correction." But the real concern to the US economy should be that growth may once again stall and send us into another recession.
Let's look at the facts:
Government spending is drying up:
- No more homebuyer tax credits
- No more government purchasing of mortgages
- Unemployment benefits are expiring
Since February, I've been warning about a slowdown in consumer spending, which is the primary driver of the US Gross Domestic Product (GDP). I still believe analysts haven't factored this into their predictions for current quarter corporate earnings. I expect earnings disappointments by mid-summer.
Time to stay defensive, with plenty of cash on hand and your equity account stocked with quality dividend paying stocks. My mutual fund choice for long-term holding remains AIM Diversified Dividend Fund, which I own.
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