The Reformed Broker
Federal Reserve Chairman Ben Bernanke appears on a television screen on the floor of the New York Stock Exchange Thursday, June 7, 2012. When it comes to Bernanke, the Reformed Broker's views are mixed. But on this issue of dividends, he's pretty clear: almost always, yes. (Richard Drew/AP)
Yes, dividends. Almost always.
Why dividends? Jeremy Schwartz has done a lot of great work on the topic building on the groundbreaking research from his colleague at WisdomTree, Prof Jeremy Siegel (yes, your name has to be Jeremy to get a job at WisdomTree, I checked).
Anyway, Ritholtz and I have been constructing our secular bear market core portfolios almost exclusively with dividend-weighted ETFs since January 2011 (before everyone else went nuts for dividends) whenever we do indexes. In a secular bear, you don't want cap-weighted or price-weighted indexes, you want yield and relative value more than you want price momentum. This changes a bit in a lasting bull market, but we ain't there yet.
No one is saying dividends always work, but in a period like this why wouldn't you want to select for them in a passive portfolio? This is the kind of thing that separates good asset management from scattershot portfolios with no clear objective.
Federal Reserve Chairman Ben Bernanke is broadcast on a television screen on the trading floor of the New York Stock Exchange in this April 2012 file photo. Bernanke is schedule to speak today, in an effort to placate still-nervous investors. (Richard Drew/AP)
On a wing and a prayer: Cautious optimism as market rebounds
The ingredients are in place for yesterday's big stock rally to continue barring any fresh shocks...
- Bernanke speaks today and the Interest Rate Lorax is sure to give the market the kind of "we stand ready" and "accomodative" happytalk that it wants to hear.
- China just cut rates by 25 bps, both a tacit admission that it is choking on slack demand but a positive on balance nonetheless.
- Spain got $2 billion worth of bonds sold this morning. It was a total hustle, with Spanish banks themselves stepping up as the big buyers (demonstrating confidence!) and the lowest amount of ten-year sold since 2004 in the mix. But still. The country has covered a little more than half of its necessary funding for 2012. Long way to go, but again, this is a net positive.
- Weekly claims should be blah in comparison to the NFP shocker.
- Earnings are behind us and we're not into warning season yet.
- Sellers below 1300 SPX seem to have been cleaned up for now. Sellers above 1300 seemed to have been non-existent yesterday - it's a confidence thing: below that level they want out, above it they're satisfied to sit tight and see what happens.
If we can keep Obama off TV today and make it through the European close at mid-day, we should be alright.
Last Friday we put on a placeholder position in $WMT and added to existing longs in our fave fundamentally-weighted index holdings ($SDY, $DEM, $XBI etc). Other than that, sitting on our hands - we still believe the worst is still somewhere out there on the horizon even while we welcome this respite.
This live presentation of jousting and heavy fighting by members of the Barony of Wastekeep, the local chapter of the Society for Creative Anachronism, from a May 2012 file photo may serve as a reminder to investors dealing in high risk stocks: if you live by the sword, you may just die by it, too. (Richard Dickin/The Tri-City Herald/AP)
If you live by the sword investors, remember you die by it, too
I want to call attention to something that I think is a really important lesson for investors and, to a lesser extent, traders. The first quarter of this year was an absolute risk-on extravaganza for US stocks. Not only did raw beta (the S&P 500) give you a 12% howyadoing, some of the most horrid and risky stocks were able to deliver more than double that return (Bank of America, anyone? Netflix! etc).
And if you were running a pedal-to-the-metal book of holdings in that atmosphere - and picked a few of the standouts while concentrating in them heavily, you had one hell of a quarter. No one exemplified this concept better than hedge fund manager Whitney Tilson of T2 Partners.
This was from his March investor letter (as relayed by Business Insider):
Our fund rose 10.6% in March vs. gains of 3.3% for the S&P 500, 2.1% for the Dow and 4.3% for the Nasdaq. Year to date, during the best first quarter for the S&P 500 and Dow since 1998, and the best for the Nasdaq since 1991, our fund also had its best first quarter, jumping 23.6% vs. 12.6% for the S&P 500, 8.8% for the Dow and 18.9% for the Nasdaq.
26% in Q1 is outstanding no matter which way you slice it. Tilson had a tough 2011 but came into the beginning of the year very strong. But for investors looking at this quarterly performance, the stated return should NEVER be the focal point - it should always be a question of "how was this return produced." Now we know the answer - it was produced by taking aggressively-sized positions in a collection of volatile, out-of-favor "value" names in the context of a junk rally, a from-worst-to-first meltup that saw last year's losers benefit from a cessation of year-end shelling selling.
I like Whitney, always have. He is more forthcoming than almost any other hedge fund manager I can think of, admits his losses and is never shy about laying out his investment theses in public forums, essentially availing himself to the critiques of a million armchair portfolio managers around the world. I give him credit for that and I respect the amount of homework he does on each of his ideas.
But we have to talk about the consequences of not knowing the "how" and only paying attention to a portfolio's stated return in a given period. Here's how Whitney fared in May with his strategy and stockpicking (via ValueWalk):
Our fund fell 13.6% in May vs. -6.0% for the S&P 500, -5.9% for the Dow and -7.1% for the Nasdaq. Year to date, our fund is up 8.5% vs. 5.2% for the S&P 500, 2.6% for the Dow and 8.9% for the Nasdaq.
On the long side, other than our two largest positions, Berkshire Hathaway (-1.6%) and Iridium warrants (-2.8%), everything else got clobbered: Pep Boys (-37.8%), J.C. Penney (-27.3%), Dell (-24.7%), Sears Canada (-23.2%), JPMorgan Chase & Co.(NYSE:JPM) (-22.9%), Netflix (-20.8%), Barnes & Noble (-20.8%), Citigroup (-19.8%), Grupo Prisa (B shares) (-19.3%),Goldman Sachs Group, Inc. (NYSE:GS) (-16.9%), American International Group, Inc.(NYSE:AIG) (-14.3%), Resource America (-12.9%), SanDisk (-11.6%), and Howard Hughes (-10.8%)
Our short book declined substantially more than the market (though not nearly enough to offset the losses on the long side), led by Green Mountain Coffee Roasters, which announced dreadful earnings and fell 51.6%. Other winners included First Solar (-31.7%), Nokia (-26.8%), Salesforce.com (-11.0%), Tesla (-11.0%), and St. Joe (-10.4%), partially offset by Interoil (+9.9%).
It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history.
Now for a hedge fund manager, this is perfectly acceptable, big risk alongside the prospects of even bigger rewards. Volatility being just a distraction and risk management being virtually non-existent here (how else can you explain having positions down almost 40%?).
But is this an acceptable strategy for you? Is this level of volatility worthwhile?
The next time you are told of an eye-popping track record or rate of return, roll your tongue back up into your mouth and ask the following question:
"But how were those returns produced?"
Most strategies aren't successful in all market climates and very few outliers are repeatable in the investment management world (ask the folks who piled into Paulson's hedge fund in 2010).
Live by the sword, die by the sword. Tilson is a swordsman.
Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission chairman Gary Gensler talk to reporters after testifying at a Senate hearing on systemic risk and market oversight, in Washington in this May 2012 file photo. The SEC in 2010 stopped approving new funds, including ETFs, that make significant use of derivatives, pending a review. (Jonathan Ernst/Reuters)
Proceed with caution: State of the Exchange Traded Products
Exchange Traded Products (ETPs) are probably in the 3rd or 4th inning of their renaissance. As a professional and both a frequent user and critic of them, I've learned to take the good with the bad.
I believe that at a certain point in the coming decade, the ETP wrapper will completely swamp the mutual fund and ultimately put it out of its misery. This is not to say that I'm thrilled with everything happening in ETP land, specifically the rise of derivative-based ETNs that are probably way less steady and understandable than they should be.
The state of the biz via Bloomberg below:
ETPs were the fastest-growing major investment product over the past decade, as investors embraced their simplicity, tax efficiency and low cost. Assets in the U.S. increased almost 14- fold in the 10 years through April 30 to $1.19 trillion, according to the Investment Company Institute. US investors added $4.82 to exchange-traded products last year for every $1 they deposited with mutual funds.
Those same investors can choose from more than 1,400 ETPs, a term that includes funds, trusts and unsecured notes, according to data compiled by Bloomberg. Exchange-traded notes, the equivalent of bonds, are unique among ETPs in that they aren’t backed by a pool of holdings owned by shareholders. They represent merely a promise to pay a return, defined typically by an index.
Derivative-based ETPs and ETNs have swelled since they were introduced in 2006 to $58.8 billion, accounting for 4.9 percent of ETP assets in the US. The SEC in 2010 stopped approving new funds, including ETFs, that make significant use of derivatives, pending a review. The suspension doesn’t affect products such as ETNs that aren’t registered under the 1940 Investment Company Act.
Innovation is great, but we have to accept the fact that there will be failed and even dangerous innovations along the way. In my view, we are at the stage now where many dangerous notions are being productized - so it is up to the individual to not do stupid things with new vehicles they don't truly understand.
Gold bars are displayed during a photo opportunity at the Ginza Tanaka store in Tokyo, in this September 2009 file photo. With current gold prices levels reading 1500 an ounce, at least one analyst think the hallowed metal may be flirting with breaking under. (Yuriko Nakao/Reuters/File)
Could gold really be on the ropes?
I'm not a technical analyst by training although I've been forced to both respect and understand technicals over the last 15 years the hard way. The shop I work at has integrated a technical discipline into everything we do on the analytics side, which frankly has been a big help to me in terms of risk management and understanding the supply/demand picture from 50,000 feet up.
When looking at gold ($GLD), you can be an expert in the fairy tale aspect of it and cite episodes from Ancient Sumeria as proof of its value - or you can grow up and accept the fact that it is literally the ultimate Greater Fool trade, for better or for worse. Since there are no earnings produced from gold we really only have supply and demand to go by, and that is why the technicals are really all that matter with this particular "asset class." I'm speaking to an audience of 6000 gold bugs in Vancouver next Monday, if I should disappear as a result of this post, please give my blog to Tadas Viskanta and my Twitter handle to Joe Weisenthal, as per my living will.
Anyway, 150 seems like a pretty important level for $GLD (1500 for an ounce of gold) and it seems to be flirting with breaking under as we speak.
People stand next to windows above an exterior sign at the Lehman Brothers headquarters in New York in this 2008 file photo. The SEC has cleared Lehman Brothers of possible financial fraud. (Chip East/Reuters/File)
SEC won't take action against Lehman Brothers
Looks like Lehman's former execs are in the clear...
From Bloomberg:
U.S. Securities and Exchange Commission investigators have concluded their probe of possible financial fraud at Lehman Brothers Holdings Inc. and determined that they will probably not recommend any enforcement action against the firm or its former executives, according to an excerpt of an internal agency memo.
The agency has been grappling with the case for more than three years amid questions from lawmakers and investors as to whether Lehman misrepresented its financial health before filing the biggest bankruptcy in U.S. history in September 2008.
Under a heading reading “Activity in the Last Four Weeks,” the undated document reads, “The staff has concluded its investigation and determined that charges will likely not be recommended.”
Why not? No harm, no foul. Everyone hides tens of billions in losses these days, whatever!
A Goldman Sachs sign is seen on at the company's post on the floor of the New York Stock Exchange in this January 2012, file photo. Goldman Sachs just joined Twitter, and Brown has a few tips to help the company tweet its best. (Brendan McDermid/Reuters/FIle)
Welcome to Twitter, Goldman Sachs!
Goldman Sachs sent its very first tweet Thursday morning, it was adorable.
Anyway, thought I'd chime in with a few quick tips and suggestions...
1. Be cool. Not everything on your stream has to be PR
2. Tweet research like UBS @UBSAmericas
3. Also join StockTwits and be sure to blast some equity upgrades and downgrades through there - its where all the tickerhounds and traders and investors are, may as well engage.
4. Follow good people, smart people, not just lame, mainstream, boring, "safe" people
5. Wouldn't kill you to throw some RTs around. You'll probably be at 50k followers before year-end, that kind of thing goes a long way in social media
6. Have some fun, be quirky. Why not change the avatar to a picture of a squid for a day, why not tweet a link to an old Muppet Show clip. This ain't LinkedIn, this is the Twitter, relax.
Anyway, I'm sure you'll do none of these things, but I wish you luck, see you on the stream - J to the B
A money changer shows some one-hundred US dollar bills at an exchange booth in Tokyo in this file photo. Brown argues for more uniform standards for evaluating financial advisers. (Issei Kato/Reuters/File)
Uniform perfomance standards for financial advisers?
One of the most frustrating aspects of running separate accounts for clients is performance documentation. The majority of the accounts most FAs manage are model-based but there are always small differences and tweaks and variations for a host of reasons (unlike a mutual fund or a hedge fund) - this makes demonstrating performance very difficult in terms of regulatory compliance.
Technology has brought transparency to virtually every industry and my friends at Brightscope are committed to bringing it into the FA business as well.
Their latest project involves developing a new standard to help both advisors and their potential clients asses and display the actual results they've delivered.
From Forbes:
There were two fundamental reasons why we chose to create BrightScope Advisor Pages. The first is that we felt consumers did not have easy online access to the information necessary to properly vet a current or prospective advisor. The second is that we believe that the financial advisory industry can accelerate its growth and increase its legitimacy by creating standards around performance, experience, certifications, fees, and conduct. The data necessary to build standards around experience, certifications, fees, and conduct for the most part already existed in public databases but simply needed to be aggregated intelligently so it could be used for comparative purposes. The data to build standards around performance does not exist at all because the industry has never coalesced around a single standard. Currently many advisors and broker-dealers do not calculate and do not disclose performance to the general public, making it difficult for prospects to select the right advisor and challenging for the best advisors to grow their practice. As a result, the act of selecting an advisor has been mostly limited to personal recommendations, and what little information consumers can find on the SEC and FINRA websites.
We think it’s time for a single new performance standard for retail financial advisors...
Full disclosure: I am a proud member of the Brightscope Advisory Board.
The Nasdaq Composite stock market index is seen inside their studios at Times Square in New York in this 2011 file photo.Brown argues that the roller coaster performance of US stocks in 2012 can be attributed to a variety of factors, including a recovering housing market and financial instability in Europe. (Shannon Stapleton/Reuters/File)
Explaining the bumpy stock market
Stocks get pulled higher today on a combination of dovish comments out of China (I know), a big M&A deal in industrial conglomerates (Eaton for Cooper Inds) and a lack of horrific Euro headlines overnight. And they were due for a bounce after 13 down days in the last 15 for the Dow.
There is a Push-n-Pull thing happening with US equities here that is very difficult to deal with on an intraday basis but makes a lot of sense when viewed from a further back perspective. It's never easy stepping back from the quotes on whatever we're trading to look at the big picture. But it's become a skill that I've become determined to learn these past five years. I will probably still be learning it a year from now, ten years from now and forever.
Anyway...
The Push lower comes from:
1. A rapidly deteriorating sitch in peripheral Europe
2. A looming recession for core Europe based on all of the latest readings
3. A slow-mo bank run (bank jog?) that some feel portends a credit freeze if it spreads
4. Awful macro data from China when seasonally-adjusted and put together from various sources (Beijing PMI, HSBC Flash PMI, real estate metrics, available credit, commodity consumption/warehousing etc)
5. Second derivative slowing in US housing / jobs data (still growing but growing at a softer pace)
6. Corporate earnings peak fears (last quarter's beat rate dropped from 72% to 59% as the season wore on, guidance was meh)
7. JPMorgan, Chesapeake, Yahoo, Facebook and other individual stories serving to tamp down on enthusiasm for equities in general, the combined effect is multiple compression
8. Technicals are shot, key sectors/ indices broken, Dow Theory sell signal with trannies and industrials confirming the drop
The Pull higher comes from:
1. Stocks are hated
2. Stocks are not especially expensive
3. Bonds are over-loved and totally unproductive for investment capital given current yields
4. The Fed and the White House both want the stock market higher, the Fed will reach into its bag of tricks again
5. We are out of crisis mode on unemployment and housing/foreclosures
6. Euro leaders desperate enough to pull another shock-and-awe announcement out of their asses any minute (aka Tapebombing)
7. Everyone's leaning the same way (wait-and-see mode)
8. The market is here to frustrate me and I am lightly invested
So there you have it, your guide to the push-n-pull currently underway.
Enjoy your summer.
A man stops to photograph Nasdaq in Times Square as Facebook has its IPO, Friday, May 18, 2012, in New York. According to some, the company's public offering could give online trading a boost. (Richard Drew/AP/File)
Will the Facebook IPO save online brokers?
The online brokers need a hit record. About as badly as Kelly Clarkson does right about now - one more shot of juice to keep things moving or else it's state fairs and Sears grand openings forever.
Brokerage firm equities trading has been a dead and dying business as the majority of investors yank money from portfolios and the more aggressive traders swim upstream (downstream?) to the options, futures and forex sites.
But the online brokerages are really excited today...
From MarketWatch:
“All of our customers are primarily going to trade the Facebook IPO in the secondary market...We’ll see lot of intraday trades; a lot of volatility. Customers will try to buy it at $65 and then jump out at $70 and then buy again if it goes back down.”
“It turns the light on in a dark room...It draws attention to the deal and the marketplace. People follow along and then look to the next deal.”
And from ValueWalk:
Ameritrade spokeswoman Beth Evegan said to MarketWatch, “IPOs drive trading volume for Main Street. Twenty-one percent of our clients that bought GM on the day of its IPO had not traded in three months. So one of the bright spots we observed was the IPOs bring about some re-engagement from retail investors who previously were sitting on the sidelines.”
Facebook IPO as economic stimulus for the online brokerage biz. Adorable.
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