One of the success stories that didn't didn't get around too much last year (or even today) is the relatively obscure investment market of the Philippines.
Their stock market jumped over 46% (yes you read that right) in 2012 and are up another 20% year to date in 2013. Those are beyond just beating the market, they're killing the US returns.
Why? Well for one, Philippines is still in the early part of the industrialization cycle so it has room to grow and the manual labor (read: population, its close to if not over 100 million now) to make it happen. Fitch just recently upgraded the Philippines into BB+ yesterday, it is now investment grade. Why is that important? In theory it shouldn't be that big of a deal, as investment grade is sort of an artificial line someone thought up and drew. But in reality, many funds and asset holdings are not allowed to invest in non-investment grade assets.
For example, pension funds for teachers or retirements, they're required to be safe and conservative funds as nobody wants to hear their retirement savings just got speculated away (imagine the riots there...). So as a relatively universal line, those funds (and there's a LOT of them) would not invest unless they been "blessed" with an investment grade.
(Edit: Just a clarification, only Fitch has upgraded, the other 2 rating agencies have not yet. Most funds require 2 of the 3 to provide investment ratings. However, the agencies tend to follow each other.)
The Philippines now has that and the money is starting to pour in.
As per Bloomberg:
The Philippines Stock Exchange Index (PCOMP) surged to a record and the peso climbed the most since September after Fitch Ratings raised its assessment of the nation’s long-term foreign- currency-denominated debt to BBB- from BB+ yesterday. Foreign portfolio inflows into the $225 billion economy climbed to $2.1 billion in February, about 40 percent higher from a year earlier, after surging to a 10-year high in 2012.
Now what's the downside? Well...where investment money flows...asset bubbles occur. That much money going to a place that's not ready for it is a minor disaster in the making. Many people point to the Asian financial crisis of the 90s as being caused by that.
I think there's a very real risk of it. You don't just got up 60% in the stock market in 1.3 yrs without feeling a bit nervous... The question now is whether its too late to jump in to ride that bubble a bit. Hard to say. Riding bubbles is incredible, you just have to know when to get off...
Sunday, 31 March 2013
Wednesday, 27 March 2013
US vs the World - Trends Have Separated
One of the most perplexing things to me about this rally is how it has decoupled quite a bit from market indices in the rest of the world. Generally, especially post-financial crisis, the macro factors have dominated the rallies and declines more than anything else. As such, there has been an incredibly strong correlation between most of the major market indices.
However, look at the following charts:
The US S&P 500 index hit a low in mid Nov and then climbed steadily up. A mild hiccup occurred at the end of Feb but the trend is clearly upwards and we are now hitting all time highs.
The US trend looks even more perplexing if you look at the emerging markets. As opposed to Germany which peaked in Feb, emerging markets peaked on the first day of the year and has been going down ever since. Its now down almost 6% since that peak.
As I said, there are a lot of similarities in market movements today (notice all of them bottomed in mid Nov) and yet the US is the only one that pushed upwards continuously while almost all the other markets have fallen. This short term discrepancy usually corrects itself...eventually. So either the other markets will rally up or the US will drop. Which do you think is more likely to happen? This is not a clear sign but just a number of various indicators which makes me feel somewhat uneasy about the current US market trend.
However, look at the following charts:
The US S&P 500 index hit a low in mid Nov and then climbed steadily up. A mild hiccup occurred at the end of Feb but the trend is clearly upwards and we are now hitting all time highs.
However, looking at Germany, while it also had a bottom in mid Nov, it rose to hit a peak at the beginning of February. It is since down almost 7% since that high. That's a big difference vs the US which is up 4% in that time frame.
The US trend looks even more perplexing if you look at the emerging markets. As opposed to Germany which peaked in Feb, emerging markets peaked on the first day of the year and has been going down ever since. Its now down almost 6% since that peak.
As I said, there are a lot of similarities in market movements today (notice all of them bottomed in mid Nov) and yet the US is the only one that pushed upwards continuously while almost all the other markets have fallen. This short term discrepancy usually corrects itself...eventually. So either the other markets will rally up or the US will drop. Which do you think is more likely to happen? This is not a clear sign but just a number of various indicators which makes me feel somewhat uneasy about the current US market trend.
If you forecast rain long enough...
...you'll be right eventually. So yes I do write for MarketWatch so I'm not impartial but I thought this article today was rather silly.
From: MarketWatch: An ‘I told you so’ moment for early Apple bear
In 2010, when Apple AAPL -1.96% stock was trading at $199, Edward Zabitsky, CEO of ACI Research in Toronto, was the only analyst on Wall Street to rate the stock a “sell.” Over the next two years, shares went on a tear, peaking at just over $705 and making Apple the world’s largest company as measured by stock-market value. Today, shares have fallen by more than a third from that high — to $461 — and Exxon Mobil Corp. has overtaken Apple in the rankings. Through it all, Zabitsky has stuck to his bearish call; and while he has since been joined by a couple other pros who have sell ratings on the stock, including Adnaan Ahmad at Berenberg Bank and Per Lindberg at ABG Sundal Collier, Zabitsky retains the distinction, and in some circles the notoriety, of having gotten there first.
You have a $274 price target. Is that still too pessimistic?
Zabitsky: It’s formally a one-year target, but in 3 to 6 months we’re going to see that play out. The reason I started to make noise was the rise of Samsung. If you say that now, it’s not challenged.
Now, I'm not a big fan of Apple actually (I don't particularly like Microsoft that much either) even though I have an iPhone and iPad. The much vaunted user intuitiveness and friendliness is vastly overrated and I find them to be growing quite stale over the last few years. However, its undeniable the profit and growth they've been able to get from it and its been one of the most successful products ever.
So this guy rated Apple a sell at $199 in 2010. Its now at $451 and had hit over $700 just 6 months ago. So if you had bought when they said sell, and sold at the perfect time, you would've netted a cool 250% gain. If you didn't sell at the perfect time and still hold it today, you'll be only up 127%. Boohoo, only a 127% gain in 3 yrs. If you followed this guy's advice, that's how much you would've left on the table. So why would he be famous or popular at all? Shouldn't he have been fired for making one of the worst investing decisions ever?
Maybe if Apple rose skyhigh and crashed into bankrupcty that he can argue his case, but it didn't and Apple is nowhere like that. He was wrong, plain and simple. In the stock market, its easy to know if you're right or wrong, just compare the amount of money you made (or didn't made). Now you can be right but still lose money if you didn't time it right, but its clear.
Ask yourself this, who would you rather have managed your money? The guy that made you 127% or the guy that costed you 127% opportunity cost loss? I know which one I would've preferred. Oh and this article is now the most popular on MarketWatch...
Tuesday, 26 March 2013
The REAL issue behind Cyprus
While the news around Cyprus has mostly died down here in favor of the many many media stories on the S&P 500 hitting an all time high, there's a very long lasting impact from the "bailout" deal. It has to do with the very public realization that your bank deposits are NOT safe.
People talk about "risk free" rate of return and generally that is very short term US government bonds. However, that is not really risk free as there is always the small chance of US default (see all the budget hooplas over the last couple years). As well there is the real chance of US bonds dropping in value. With the interest rate as low as it is, any rise of rate will cause a drop in bond prices and thus a potential loss. So that's not really risk free in my opinion, especially for small investors.
So for small investors, real risk free is bank accounts, CDs and savings account. Yeah they have crappy interest rates but most people see that as zero risk. This was not always the case, its only this way because of FDIC Insurance. People don't remember the days before FDIC insured deposits were around but bank runs and losing your money because someone else had withdrawn it already was a very big and prevalent problem.
The Euro bailouts has always protected the depositors at the expense of shareholders and bondholders...until Cyprus. The Cyprus deal essentially cuts deposits above the insured 100k Euro, likely everyone will lose almost all of their deposits above that. Now the key point is that this is NOT some third world country or some unreliable tax haven country like Bermuda. No this is a country with the full backing of the EU and the EU with all their money is willing to do this.
With this precedent, I expect a mild bank run situation to occur in vulnerable banks in other problem countries like Spain and Greece and also tax haven countries like Luxembourg where people realize there isn't that much safety. Luxembourg banks has somewhere around 22x more financial assets than it has GDP, a big drop in their value will never be recoverable via taxes.
Naked Capitalism had a good summary of other aspects of the Cyprus deal, a few excepts here:
As we’ve indicated before, the threat is that bank runs start in other periphery countries, based on a recognition that their bank is at risk plus a concern that they will be made to take losses, as large depositors were in Cyprus. We never thought the odds of a “hot” run, as in people lining up at banks to withdraw money, was all that high, and it’s been reduced even further by the fact that depositors under €100,000 were spared. However, we think the slow-motion departure of depositors from periphery banks is likely to resume. It was arrested by the introduction last September of the OMT, which was peculiar since the OMT was merely a clever PR exercise that simply repackaged existing ECB powers. But the ham-handed ambush of the Cypriot president Anastasiades and the initial rejection by Parliament of the ultimatum elevated international interest in the negotiations. Commentators generally disapproved of the plan to whack all depositors, particularly small ones. Even though they are likely to be less critical of the final plan, which haircuts only big depositors at the two biggest banks, the imposition of capital controls has produced, if anything, an even more negative reaction.
It isn’t hard to see why an business owner or a wealthy individual in the periphery countries who hasn’t moved his money out of banks in his country might think twice. Before, the worry was that some country might exit the Eurozone, and if that happened to be your country, your deposits would be redenominated in New Currency which would plunge in value relative to the euro, leave you poorer. While that risk may continue to be seen as de minimus, we now have two new reasons to wonder about the wisdom of standing pat with home-grown banks.
People talk about "risk free" rate of return and generally that is very short term US government bonds. However, that is not really risk free as there is always the small chance of US default (see all the budget hooplas over the last couple years). As well there is the real chance of US bonds dropping in value. With the interest rate as low as it is, any rise of rate will cause a drop in bond prices and thus a potential loss. So that's not really risk free in my opinion, especially for small investors.
So for small investors, real risk free is bank accounts, CDs and savings account. Yeah they have crappy interest rates but most people see that as zero risk. This was not always the case, its only this way because of FDIC Insurance. People don't remember the days before FDIC insured deposits were around but bank runs and losing your money because someone else had withdrawn it already was a very big and prevalent problem.
The Euro bailouts has always protected the depositors at the expense of shareholders and bondholders...until Cyprus. The Cyprus deal essentially cuts deposits above the insured 100k Euro, likely everyone will lose almost all of their deposits above that. Now the key point is that this is NOT some third world country or some unreliable tax haven country like Bermuda. No this is a country with the full backing of the EU and the EU with all their money is willing to do this.
With this precedent, I expect a mild bank run situation to occur in vulnerable banks in other problem countries like Spain and Greece and also tax haven countries like Luxembourg where people realize there isn't that much safety. Luxembourg banks has somewhere around 22x more financial assets than it has GDP, a big drop in their value will never be recoverable via taxes.
Naked Capitalism had a good summary of other aspects of the Cyprus deal, a few excepts here:
As we’ve indicated before, the threat is that bank runs start in other periphery countries, based on a recognition that their bank is at risk plus a concern that they will be made to take losses, as large depositors were in Cyprus. We never thought the odds of a “hot” run, as in people lining up at banks to withdraw money, was all that high, and it’s been reduced even further by the fact that depositors under €100,000 were spared. However, we think the slow-motion departure of depositors from periphery banks is likely to resume. It was arrested by the introduction last September of the OMT, which was peculiar since the OMT was merely a clever PR exercise that simply repackaged existing ECB powers. But the ham-handed ambush of the Cypriot president Anastasiades and the initial rejection by Parliament of the ultimatum elevated international interest in the negotiations. Commentators generally disapproved of the plan to whack all depositors, particularly small ones. Even though they are likely to be less critical of the final plan, which haircuts only big depositors at the two biggest banks, the imposition of capital controls has produced, if anything, an even more negative reaction.
It isn’t hard to see why an business owner or a wealthy individual in the periphery countries who hasn’t moved his money out of banks in his country might think twice. Before, the worry was that some country might exit the Eurozone, and if that happened to be your country, your deposits would be redenominated in New Currency which would plunge in value relative to the euro, leave you poorer. While that risk may continue to be seen as de minimus, we now have two new reasons to wonder about the wisdom of standing pat with home-grown banks.
Second, capital controls in Cyprus mean that there are now two Euros in effect: The Euro that you can use only in Cyprus, and the Euro you can use elsewhere in the so-called “monetary union.” So from the perspective of people in Cyprus, the results are in some ways worst that a breakup: rather than having depreciated dough, you have dough that has been impounded, particularly in terms of using it outside Cyprus.
In each case, why wouldn’t every business owner or wealthy Euro-holder in the periphery go into “First, they came for the Cypriots” mode, take economist Krämer at his word, and move their money to where they had some reason to believe it was safe?
Sometimes...
Sometimes its just hard to write a good article...
Well I guess everyone will have their off days right?
Well I guess everyone will have their off days right?
Monday, 25 March 2013
Is Cyprus story over?
Yeah they came to an agreement on the Cyprus bailout but the story is far from over. Expect to continue seeing some burning as time goes on.
However, I think Cyprus brought this on themselves somewhat. Did they really expect to continue making an economy out of hiding Russian (likely illegal) money? It was hardly a sustainable economy. While that sort of model has worked for Switzerland, not everyone can become that.
As per Bloomberg:
Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, shouting for the bailout “troika” of the EU, European Central Bank and IMF to leave Cyprus, a country of 862,000 people.
The deal imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank (CPB) as it’s wound down.
Bank assets in Cyprus swelled to 126.4 billion euros at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the ECB and the EU’s statistics office show.
However, I think Cyprus brought this on themselves somewhat. Did they really expect to continue making an economy out of hiding Russian (likely illegal) money? It was hardly a sustainable economy. While that sort of model has worked for Switzerland, not everyone can become that.
As per Bloomberg:
Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, shouting for the bailout “troika” of the EU, European Central Bank and IMF to leave Cyprus, a country of 862,000 people.
The deal imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank (CPB) as it’s wound down.
Bank assets in Cyprus swelled to 126.4 billion euros at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the ECB and the EU’s statistics office show.
A poll this month by Prime Consulting for Sigmalive TV found 67.3 percent of Cypriots said the country should leave the euro and tighten relations with Russia. The survey of 686 people on March 19-20 found 91 percent of respondents supported the parliament’s decision to reject the initial bailout deal with the proposed losses for depositors.
“Our lives are going to be terrible,” said Philippou, the civil servant in the Cypriot capital. “My husband works at a computer company that does business with the financial sector so I’m worried what will happen to him.”
The Cypriot economy contracted 3.4 percent in the fourth quarter of 2012 from a year earlier. The budget for this year had projected it will shrink 3.5 percent this year.
Friday, 22 March 2013
Why will be losing in Cyprus bank deposits?
This story is getting more fascinating by the day it seems. I think the most intriguing aspect of the bank and bank deposit issue is the light its shedding on Russian money and role in Cyprus.
I mean, this is a banking sector that's 8 times bigger than the Cyprus GDP. Think about that...if that was in the US, that would mean a bank sector asset at over $100 trillion. The GDP of the entire world in 2011 was only $70 trillion.
Why is Cyprus so big? Apparently Russian oligarchs and rich hide their assets there. That's very rationale as the Russian legal system is sorta at the whims of the government and losing favor there would mean losing everything. For an example, see the case of Mikhail Khodorkovsky who is still in jail and broke after running afoul of Putin. So why not hide your money somewhere? Namely Cyprus, after all, its in the EU! What can go wrong?
Per the NY Times:
Russian money flowing into Cypriot banks dwarfs the island’s $25 billion economy. About 25 percent of Russian foreign direct investment moves through Cyprus, according to an estimate by Morgan Stanley, frequently in a “round-trip” process that serves to lubricate the Russian economy. Cypriot entities, often owned by rich Russians, lent $40 billion a year to Russia from 2007 through 2011.
...
The stakes are particularly high for wealthy Russians: Moody’s, the rating agency, has estimated that Russian deposits in banks and loans to Cypriot companies total $70 billion, or about 4 percent of Russia’s gross domestic product. Some 42 percent of the value of Cypriot bank deposits is in accounts with more than half a million euros.
While the final plan for the deposit tax is not yet determined, some estimates range from 40-60% loss on deposits greater than 100k euros. That is amazingly crazy. While it seems like this will hit the Russians more than the Cryprus population, the loss of banking confidence and deposit insurance will be potentially crushing, especially if this spreads.
Banks are incredibly dependent on trust and FDIC insurance in the US have made bank runs virutally all but nonexistent. Bringing us back to the days before FDIC? Potential collapse of the credit market...again.
I mean, this is a banking sector that's 8 times bigger than the Cyprus GDP. Think about that...if that was in the US, that would mean a bank sector asset at over $100 trillion. The GDP of the entire world in 2011 was only $70 trillion.
Why is Cyprus so big? Apparently Russian oligarchs and rich hide their assets there. That's very rationale as the Russian legal system is sorta at the whims of the government and losing favor there would mean losing everything. For an example, see the case of Mikhail Khodorkovsky who is still in jail and broke after running afoul of Putin. So why not hide your money somewhere? Namely Cyprus, after all, its in the EU! What can go wrong?
Per the NY Times:
Russian money flowing into Cypriot banks dwarfs the island’s $25 billion economy. About 25 percent of Russian foreign direct investment moves through Cyprus, according to an estimate by Morgan Stanley, frequently in a “round-trip” process that serves to lubricate the Russian economy. Cypriot entities, often owned by rich Russians, lent $40 billion a year to Russia from 2007 through 2011.
...
The stakes are particularly high for wealthy Russians: Moody’s, the rating agency, has estimated that Russian deposits in banks and loans to Cypriot companies total $70 billion, or about 4 percent of Russia’s gross domestic product. Some 42 percent of the value of Cypriot bank deposits is in accounts with more than half a million euros.
While the final plan for the deposit tax is not yet determined, some estimates range from 40-60% loss on deposits greater than 100k euros. That is amazingly crazy. While it seems like this will hit the Russians more than the Cryprus population, the loss of banking confidence and deposit insurance will be potentially crushing, especially if this spreads.
Banks are incredibly dependent on trust and FDIC insurance in the US have made bank runs virutally all but nonexistent. Bringing us back to the days before FDIC? Potential collapse of the credit market...again.
Wednesday, 20 March 2013
FOMC Statement & Conference
The Calculated Risk blog has a good summary of what the FOMC results were from today.
The unemployment rate was at 7.7% in February.
The FOMC believes inflation will stay below target.
Here is core inflation:
On the projections, GDP was revised down slightly, the unemployment rate was revised down, and inflation was revised down slightly.
| GDP projections of Federal Reserve Governors and Reserve Bank presidents | |||
|---|---|---|---|
| Change in Real GDP1 | 2013 | 2014 | 2015 |
| Mar 2013 Meeting Projections | 2.3 to 2.8 | 2.9 to 3.4 | 2.9 to 3.7 |
| Dec 2012 Meeting Projections | 2.3 to 3.0 | 3.0 to 3.5 | 3.0 to 3.7 |
The unemployment rate was at 7.7% in February.
| Unemployment projections of Federal Reserve Governors and Reserve Bank presidents | |||
|---|---|---|---|
| Unemployment Rate2 | 2013 | 2014 | 2015 |
| Mar 2013 Meeting Projections | 7.3 to 7.5 | 6.7 to 7.0 | 6.0 to 6.5 |
| Dec 2012 Meeting Projections | 7.4 to 7.7 | 6.8 to 7.3 | 6.0 to 6.6 |
The FOMC believes inflation will stay below target.
| Inflation projections of Federal Reserve Governors and Reserve Bank presidents | |||
|---|---|---|---|
| PCE Inflation1 | 2013 | 2014 | 2015 |
| Mar 2013 Meeting Projections | 1.3 to 1.7 | 1.5 to 2.0 | 1.7 to 2.0 |
| Dec 2012 Meeting Projections | 1.3 to 2.0 | 1.5 to 2.0 | 1.7 to 2.0 |
Here is core inflation:
| Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents | |||
|---|---|---|---|
| Core Inflation1 | 2013 | 2014 | 2015 |
| Mar 2013 Meeting Projections | 1.5 to 1.6 | 1.7 to 2.0 | 1.8 to 2.0 |
| Dec 2012 Meeting Projections | 1.6 to 1.9 | 1.6 to 2.0 | 1.8 to 2.1 |
Tuesday, 19 March 2013
Another ETF Comparison - Emerging market - EEM vs VWO
As a follow up to the S&P 500 comparison, this is some of the data for the emerging market ETFs. Originally was going to include this as part of my article but ended runningout of space to show it so figured I'll just put it here or write it up at another date and time.
The two comparisons are the iShares EEM vs the Vanguard VWO.
While EEM has been around longer, in the last year or two, Vanguard VWO has surpassed EEM to become the premier emerging market ETF. It also has a dramatically low expense ratio, only 1/3 of what EEM is charging. Note that these numbers are relatively new, until the last few months, VWO was also using the MSCI Emerging Market Index which ended up having a higher cost due to licensing the index from MSCI. Switching to FTSE Emerging Transition Index is part of the reason the costs are lower.
So what's the difference between these two indices? The main one is that FTSE does not consider South Korea to be an emerging market anymore and thus is not included in the ETF. MSCI still does (though under review) so moving forward, there should be a significant impact and divergence between these indices. EEM actually doesn't fully replicable MSCI actually, instead it has a sampling strategy while VWO is more complete replication.
As an example of the difference, Samsung is the top holding in EEM at 3.86% which would not be found in VWO moving forward. However, the date for change is uncertain as Vanguard still lists Samsung in the holdings as of Feb 28.
Here is the performance delta. There are several years where EEM changes dramatically vs the index, part of this is due to the sampling strategy.
If you start from 2006 where both has return data, you'll find that you'll end up with 66.7% return on EEM during that time frame but end up with 72.4% on VWO. That is a huge 5% difference for two funds that are supposedly very similar.
Seems quite obvious which one you should purchase....(assuming South Korea representation doesn't throw any wrenches into that plan).
The two comparisons are the iShares EEM vs the Vanguard VWO.
While EEM has been around longer, in the last year or two, Vanguard VWO has surpassed EEM to become the premier emerging market ETF. It also has a dramatically low expense ratio, only 1/3 of what EEM is charging. Note that these numbers are relatively new, until the last few months, VWO was also using the MSCI Emerging Market Index which ended up having a higher cost due to licensing the index from MSCI. Switching to FTSE Emerging Transition Index is part of the reason the costs are lower.
So what's the difference between these two indices? The main one is that FTSE does not consider South Korea to be an emerging market anymore and thus is not included in the ETF. MSCI still does (though under review) so moving forward, there should be a significant impact and divergence between these indices. EEM actually doesn't fully replicable MSCI actually, instead it has a sampling strategy while VWO is more complete replication.
As an example of the difference, Samsung is the top holding in EEM at 3.86% which would not be found in VWO moving forward. However, the date for change is uncertain as Vanguard still lists Samsung in the holdings as of Feb 28.
Here are the chart showing the return performance of the two funds from their prospectus. Note that in general VWO beats EEM quite significantly several years.
Here is the performance delta. There are several years where EEM changes dramatically vs the index, part of this is due to the sampling strategy.
If you start from 2006 where both has return data, you'll find that you'll end up with 66.7% return on EEM during that time frame but end up with 72.4% on VWO. That is a huge 5% difference for two funds that are supposedly very similar.
Seems quite obvious which one you should purchase....(assuming South Korea representation doesn't throw any wrenches into that plan).
Monday, 18 March 2013
Raw Data of S&P 500 ETFs
Here's some of the data I had found and gathered for the S&P 500 ETF Marketwatch Article.
Most of the data was pulled from the individual ETF's prospectus and website.
Links: (Note that the prospectus is on these pages for you to download and read)
SPDR SPY Page
Vanguard VOO Page
iShares IVV Page
Performance Data:
Most of the data was pulled from the individual ETF's prospectus and website.
Links: (Note that the prospectus is on these pages for you to download and read)
SPDR SPY Page
Vanguard VOO Page
iShares IVV Page
Performance Data:
Benefit to Multiple Similar ETFs - Wash Loss Rules
One point I didn't mentioned in my article about the multiple of similar ETFs is the tax benefit, namely the wash-loss rule.
The wash-loss rule is intended to prevent people from selling a position for tax benefits and then rebuying the same position within 30 days. While I don't really get the whole point anyway as the cost basis will be changed, it does make it annoying for people who have multiple accounts as it does mess up holding the same position in multiple places.
That's where the beauty of similar ETFs come in. Instead of buying SPY in both accounts, you can have one with SPY and the other with VOO or IVV instead.
Of course there's an inefficiency in return from doing that but it does simplify and avoid wash loss issues as they're not considered materially the same holding (as opposed to derivatives who are).
Anyways, just a bit of a minor tip.
The wash-loss rule is intended to prevent people from selling a position for tax benefits and then rebuying the same position within 30 days. While I don't really get the whole point anyway as the cost basis will be changed, it does make it annoying for people who have multiple accounts as it does mess up holding the same position in multiple places.
That's where the beauty of similar ETFs come in. Instead of buying SPY in both accounts, you can have one with SPY and the other with VOO or IVV instead.
Of course there's an inefficiency in return from doing that but it does simplify and avoid wash loss issues as they're not considered materially the same holding (as opposed to derivatives who are).
Anyways, just a bit of a minor tip.
Sunday, 17 March 2013
Un Oh - Futures are Ugly
Latest Futures...Looks like the Cyprus thing finally hit.
Stock Futures
Americas
| Index Future | Future Date | Last | Net Change | Open | High | Low | Time |
|---|---|---|---|---|---|---|---|
| DJIA INDEX | Jun13 | 14,274.00 | -150.00 | 14,389.00 | 14,389.00 | 14,272.00 | 01:43:34 |
| S&P 500 | Jun13 | 1,529.90 | -22.50 | 1,545.30 | 1,545.30 | 1,529.60 | 01:43:34 |
| NASDAQ 100 | Jun13 | 2,749.00 | -40.25 | 2,778.75 | 2,778.75 | 2,749.00 | 01:44:56 |
| S&P/TSX 60 IX | Jun13 | 735.10 | +2.80 | 732.00 | 737.10 | 731.60 | 03/15/2013 |
| MEX BOLSA IDX | Jun13 | 42,774.00 | -736.00 | 43,600.00 | 43,620.00 | 42,740.00 | 03/15/2013 |
| BOVESPA INDEX | Apr13 | 56,920.00 | -448.00 | 57,400.00 | 57,670.00 | 56,880.00 | 03/15/2013 |
Picking Between S&P 500 Index ETFs
This is the subject of my next soon to be published article but I found an interest read while doing the research for it:
From ETFdb.com
Under The Hood: SPY vs. IVV vs. VOO
From ETFdb.com
Under The Hood: SPY vs. IVV vs. VOO
S&P 500 SPDR (SPY, A)
SPY is the oldest U.S.-listed ETF, having begun trading in 1993 as an innovation in the financial world. Since then SPY has become one of the largest and most-widely traded securities in the world; assets currently stand at about $105 billion and average daily trading volume exceeds 200 million shares. SPY is structured as a Unit Investment Trust (UIT), with State Street serving as the trustee. The UIT structure, very common among the earliest ETF products to hit the market, is somewhat restrictive–a feature that has both pros and cons [see also 5 Tips ETF Traders Must Know].
UITs must fully replicate their underlying index, and are restricted from lending out securities that make up their portfolio. For investors employing somewhat complex strategies that include options, these restrictions ensure that SPY will replicate the benchmark with near-perfect precision–reliability that investors utilizing derivatives demand. While all of the S&P 500 ETFs offer impressive liquidity, SPY also offers an incredibly-liquid options market [compare the open interests of SPY vs. IVV]. This further increases the appeal of SPY as a tool for investors looking to execute intra-day trades or those who maintain relatively short holding periods.
The trading volumes support this idea: nearly one third of SPY’s shares outstanding change hands every day; by comparison, IVV’s daily turnover is equivalent to only about 2% of shares outstanding. That implies that SPY, while certainly appropriate for buy-and-holders, is more widely used as a trading vehicle for more active traders [see also 17 ETFs For Day Traders].
Another unique feature of UITs relates to dividends. According to SPY’s prospectus, the ETF pays dividends four times annually, on the last business day of April, July, October, and January. Because SPY is a UIT, the fund cannot reinvest dividends paid by underlying holdings, but rather must hold them in cash until they are scheduled to be distributed to SPY shareholders. So if ExxonMobil, for example, pays a dividend on February 1, SPY would be required to keep that amount in cash until the end of April.
iShares S&P 500 Index Fund (IVV, A)
IVV, like most other ETFs, utilizes an open-end structure that provides more flexibility to the portfolio manager. Though it generally replicates the underlying index very closely, IVV is permitted to use derivatives, portfolio sampling strategies, and lend out portfolio securities to generate additional income. Perhaps most importantly, the open-end structure allows for the immediate reinvestment of dividends, potentially resulting in enhanced returns during bull markets. Whereas SPY is required to keep dividends paid out in cash, IVV has the ability to invest distributions back into the components of the S&P 500 until it is scheduled to distribute them to IVV shareholders [see also Monthly Dividend ETFdb Portfolio 
].
].The impact of this feature usually isn’t enormous, but it can contribute to slight return differentials between the two funds. Between the bear market lows in March 2009 (3/9/2009) and the end of that year, for example, SPY gained about 67.4%. IVV was up a slightly more impressive 67.7% during that same period. There are, of course, two sides to this coin. Reinvestment of dividends can adversely impact fund performance when markets are sinking. And indeed, during the equity market plunge of late 2008 and early 2009, SPY performed slightly better than IVV.
Vanguard S&P 500 ETF (VOO, A+)
The most recent addition to the S&P 500 ETF space came relatively recently, as Vanguard rolled out a suite of ETFs linked to popular S&P 500 indexes. Vanguard was a pioneer in S&P 500 indexing, launching an indexed mutual fund seeking to replicate this benchmark in 1976. VOO maintains another unique structure that differentiates it from both IVV and SPY. Vanguard maintains a patent that allows it to offer ETFs as share class within larger index funds that also offer retail and institutional share classes.
There are some potential advantages to the share class structure of the Vanguard S&P 500 ETF. Although VOO is only a fraction the size of IVV and SPY, the total pool of assets across all share classes of the Vanguard product is about $94 billion. That allows VOO to offer the lowest expense ratio of the group, charging just five basis points.
While all ETFs have the ability to offer investors enhanced tax efficiency through the in-kind redemption process, VOO’s structure may offer additional tax benefits. In response to redemption requests from other classes of shareholders, Vanguard has the option to sell off high cost-basis securities, generating a capital loss in the process that can be used to offset any taxable gains. Of course redemptions of non-ETF share classes could also result in a taxable gain, but given the massive size of the S&P 500 fund such an event is unlikely unless a wave of redemptions were to occur [see Total Cost Of ETF Investing].
Thursday, 14 March 2013
Bullish Sentiment
I've said before that by my indicators, the market is overbought and likely due for a correction. However I also said there were too many people with that line of thought and it'll require the market to continue staying high before that sentiment drops. Generally I find the market only falls when most of those people waiting for it to drop gives up (so called bear trap in a way).
Is the market getting there?
Latest sentiment survey results (from Ritholtz.com) would say we are starting to get close. Bearish sentiment dropped 6.5% to 32%...still higher than historical avg of 30.5% but its a sign the bearish sentiments are starting to die down.
The market has definitely been rough for the bears. I stay highly exposed to the market but with a slightly growing cash pile for when opportunities appear.
Is the market getting there?
Latest sentiment survey results (from Ritholtz.com) would say we are starting to get close. Bearish sentiment dropped 6.5% to 32%...still higher than historical avg of 30.5% but its a sign the bearish sentiments are starting to die down.
The market has definitely been rough for the bears. I stay highly exposed to the market but with a slightly growing cash pile for when opportunities appear.
Happy Pi Day!
Its March 14th and all scientists and engineers should recognize its Pi Day!
For those not in the know: Pi Day
For those not in the know: Pi Day
Tuesday, 12 March 2013
Streettalklive: Bob Farrell's 10 Investing Rules
Streettalklive.com just published an article (courtesy of Ritholtz.com) on the 10 Investing rules. While its really more of a primer on market movements such as bear markets and mean reversion with a hint of technicals in there, its an excellent read. There's several trends observed in there that are very relevant to our current market situation.
Except:
The 10 Rules Of Investing
See more at: Streettalklive
Except:
The 10 Rules Of Investing
1. Markets tend to return to the mean (average price) over time.
Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices which are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average. The chart below shows the S&P 500 with a 52-week simple moving average.
See more at: Streettalklive
Socially Responsible Investing Fund Performance Chart
As I mentioned in the previous post, the chart I had in my MarketWatch article was missing the chart I had showing the fund performance. Not sure why it was removed but it left the conclusions a bit hard to understand so here's the chart as was supposed to be presented.
You can see what I meant by the funds not performing very well vs the S&P 500.
Here's the data in table form.
I suppose I should create a MarketWatch comment account to let people know this?
You can see what I meant by the funds not performing very well vs the S&P 500.
Here's the data in table form.
I suppose I should create a MarketWatch comment account to let people know this?
My column titles
I have to admit...sometimes the titles on my columns get a bit strange. For those that are not aware, the process is normally I write the article and send it in for editing. Generally the editing is pretty light but the title and headline/bylines are decided by someone else.
My recent article just got posted and the description I used was simply Socially Responsible Investing. But the title on the site is:
Thinking like a pope to shape your portfolio
Commentary: When social responsibility trumps maximizing returns
A bit of a different take on the title I must admit...
NOTE: I also noticed they didn't include the chart I had showing performance of the funds...so I'll post that on this blog later on.
My recent article just got posted and the description I used was simply Socially Responsible Investing. But the title on the site is:
Thinking like a pope to shape your portfolio
Commentary: When social responsibility trumps maximizing returns
A bit of a different take on the title I must admit...
NOTE: I also noticed they didn't include the chart I had showing performance of the funds...so I'll post that on this blog later on.
Wednesday, 6 March 2013
Short Interest
Interesting post from Bespokeinvest.com regarding what people are actually shorting.
Surprisingly, utilities and financials are both both while consumer discretionary and telecoms are so high. Utilities vs telecom's are especially confusing to me as they generally tend to trend.
However, if you look at individual charts, telecoms (but also utilities) have recently been on a nice upswing. XLU, the utilities ETF just hit a 3 yr (or longer) high today. While the Dow has as well, XLU isn't always correlated to the market (its only a 0.46 beta vs the S&P). So curious.
Still a bit conflicted on short term market direction. There are indicators saying the market is too high but there are too many people (like me) expecting the market to go down. My experience has always been that when these situations occur, the market will go down but not before it makes a few more strong days that eventually cause people like me to give up and get back into the mkt. So while I am not out of the mkt, I am just reducing my holdings by a small amount and buying a few more income based dividend ETFs just to balance out the potential for a drop. We'll know in 3 months I suppose.
Surprisingly, utilities and financials are both both while consumer discretionary and telecoms are so high. Utilities vs telecom's are especially confusing to me as they generally tend to trend.
However, if you look at individual charts, telecoms (but also utilities) have recently been on a nice upswing. XLU, the utilities ETF just hit a 3 yr (or longer) high today. While the Dow has as well, XLU isn't always correlated to the market (its only a 0.46 beta vs the S&P). So curious.
Still a bit conflicted on short term market direction. There are indicators saying the market is too high but there are too many people (like me) expecting the market to go down. My experience has always been that when these situations occur, the market will go down but not before it makes a few more strong days that eventually cause people like me to give up and get back into the mkt. So while I am not out of the mkt, I am just reducing my holdings by a small amount and buying a few more income based dividend ETFs just to balance out the potential for a drop. We'll know in 3 months I suppose.
Monday, 4 March 2013
Stocking Picking and Your Chances
I did this analysis for my next column (should be published any day now) but ended up not using it due to length. My column talks about the difficultly of picking stocks such that you'll overperform the market every year.
With things like reversion to the mean, etc, very few stocks will consistently beat the market every year. Below is the compiled data of all 30 Dow components (way too many in S&P 500 to do this) for the years 2007-2012. This is excluding dividends.
Red highlight means it underperformed the Dow average that year (yes I'm aware Dow is poorly weighted but you get the idea) and green means it overperformed the Dow.
With things like reversion to the mean, etc, very few stocks will consistently beat the market every year. Below is the compiled data of all 30 Dow components (way too many in S&P 500 to do this) for the years 2007-2012. This is excluding dividends.
Red highlight means it underperformed the Dow average that year (yes I'm aware Dow is poorly weighted but you get the idea) and green means it overperformed the Dow.
So here's some things to notice from a stock picking perspective.
On average, about 50% of components beat the market and lose to the market each year. So you would think that this means it should be easy to beat the market, a 50% chance is pretty high (especially vs the only 30% or so of professional managers that beat the market).
However, generally half of the stocks that beat the market one year underperform the market the next year. For 2007, 17 stocks beat the market. In 2008, of that 17, only 11 beat. In 2009, only 5 then 3, then 2 then 0. So only zero stocks out of all 30 are positive for all 5 years. Mathematically this makes buying and holding the same stocks very hard to overperform each year.
However, if you look at the total returns after all 5 years (thus the good years can compensate for the bad years), you'll find...15 components out of 30 that beat the Dow over this time frame.
So...50:50 chance right?
Friday, 1 March 2013
USD Yen Exchange Charts
Its all over the news for the last few months for those in the currency trade, the Yen is climbing and it doesn't look to be looking back as Japan is making signs that its serious this time about the strong yen. How big has the move been? Here's a couple of charts.
This is the 2 year chart, and the Yen has risen 13% from 2 yrs and 15% vs 1 yr ago. That's a big move in the currency world.
The 5 yr chart shows just how much the Yen has dropped, it was over 110 about 5 yrs ago. While the market may be taking a small breather, there's no question that the yen is still too strong for both where the Japan economy is and where it needs to be. Don't have numbers to back it up but my feel is that the yen will get back to at least parity to the penny (at 100) at minimum at some point in the future. Its an export economy that will (and is) being crushed without a "currency manipulation".
This is the 2 year chart, and the Yen has risen 13% from 2 yrs and 15% vs 1 yr ago. That's a big move in the currency world.
The 5 yr chart shows just how much the Yen has dropped, it was over 110 about 5 yrs ago. While the market may be taking a small breather, there's no question that the yen is still too strong for both where the Japan economy is and where it needs to be. Don't have numbers to back it up but my feel is that the yen will get back to at least parity to the penny (at 100) at minimum at some point in the future. Its an export economy that will (and is) being crushed without a "currency manipulation".
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