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Kevin Feldman

 
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  • The End Result Of The Fed's Cancerous Policies [View article]
    If Lehman's balance sheet had looked anything like the Fed's, it would still be in business today, so no, I'm not particularly concerned with the Fed's leverage ratio. If it makes us all feel better, we can mark to market US gold reserves the Fed keeps on its balance sheet $42/oz. That should clear up any concerns with its leverage ratio.

    I think it's probably more helpful to look at the composition of the balance sheet. The Fed is essentially rearranging parts of the Treasury yield curve in an attempt to bring down all other rates. Holding a large portfolio of Treasury securities is not itself a problem, especially since banks have been parking trillions in excess reserves at the Fed.

    For all those who have been confused on why we haven't yet seen massive inflation following this dramatic increase in money supply, take a look at velocity which has fallen to levels not seen in the past 50 years. The Fed can rearrange parts of its bond portfolio all day long, but it's not going to mean much until we see much faster growth in credit creation and ultimately, economic output. That will be the time to start worrying about how quickly the Fed can unwind all its bond buying.
    Mar 18, 2012. 02:33 PM | 10 Likes Like |Link to Comment
  • Where Should You Allocate Your Money? [View article]
    Todd - I'm not sure I understand how an investor would use these rankings in portfolio design: Is this meant to be a tactical overlay on a larger portfolio that has some baseline (i.e. strategic) asset allocation that doesn't move around with the rankings? If so, what does that look like?

    Also, what's the benchmark to know whether you're "successful" with these country and sector tilts? ACWI?

    One challenge I see for individual (vs tax exempt) investors is how one would implement a strategy like this without generating large short-term capital gains as you move between the different countries and/or other market sectors you have in your model above.
    Mar 14, 2012. 05:26 PM | Likes Like |Link to Comment
  • Implications Of The New Normal For Retirees - Part 1 [View article]
    I'm glad you mentioned the May 2009 date when we first heard about the New Normal, which came just two months after the bear market low of March 2009.

    Since then, equity markets have rallied sharply and though bonds have also performed well given the weak recovery and unconventional monetary policies in place, it's an excellent reminder that even when the road ahead looks the most uncertain and smart people are giving us a gloomy picture of the future, we should guard against overreaction in our investment decisions.

    It will take a few more years to fully evaluate the PIMCO view and no doubt for the many who lost their jobs, this has been an extremely challenging economic period, but for investors who ignored the New Normal predictions and held steady in a balanced and diversified stock and bond allocation, their investment returns have been perhaps more normal than new.
    Mar 13, 2012. 02:51 PM | 1 Like Like |Link to Comment
  • Retirees Need More Than TIPS [View article]
    Great question!

    Actually, you hit on something that would have been a much better WSJ article for investors nearing retirement, because this is the real challenge they face in an extended period of ZIRP - how to adjust their asset allocation in a way that both reduces risk with age, but doesn't force them into negative real yields for extended periods of time.

    Yes, I would be looking for ways to reduce equity risk, perhaps even more so now that we've had such strong recent equity market returns. Perhaps the market is signaling faster economic growth ahead and if so, great news for all of us, but if you're about to retire, you don't need to take that additional gamble.

    So, what's available to reduce equity risk? As I mention at the end of the post, I would be looking to high quality international and corporate bonds to generate positive real yields. A couple good ETFs to consider for this: VCIT, LQD and EMB. EMB is a nice way to get access to US$ denominated EM debt with yields well above US treasuries.

    I would also consider some modest adjustments to the equity portfolio to favor large or even mega cap dividend stocks, which tend to be both less volatile and are producing tax-favored income under current QDI rules.
    Mar 13, 2012. 02:18 PM | 1 Like Like |Link to Comment
  • Retirees Need More Than TIPS [View article]
    Thanks for commenting.

    Yes, there are structured products that deliver various hedging strategies currently available and no doubt more of them on the way. Many of them are tailored to solving specific portfolio objectives, but in general I'm not a huge fan of using most of them over the long time period that's necessary to build a sound retirement portfolio.

    As the authors note, some of the hedging in these products is very complex and transparency is an issue. They also tend to have higher fees, which in a low return environment is only going to lower returns more.

    I think a balanced portfolio of stocks and bonds (including a small allocation to TIPS) that gradually shifts from stocks to bonds as one ages is still the best starting point for sound retirement portfolio design.

    Interestingly, the authors never mention what actually happened following the financial crisis to investors who didn't fiddle with their portfolios too much. Assuming one was broadly diversified, even a portfolio with a high allocation to equities has recovered from 2008 losses and the more typical balanced allocation that an investor nearing retirement would have had recovered a long time ago with the strong bond rally we've seen the last three years.
    Mar 13, 2012. 01:25 PM | 1 Like Like |Link to Comment
  • How Low Can The 10-Year Treasury Yield Go? (Part 1) [View article]
    Hey James. I stumbled upon this older post. Just curious if you have the same view as last fall?

    With continued Fed intervention and what looks like a continued "savings glut" I wonder if we're not in for another year or two below 2% for the 10Y.
    Mar 7, 2012. 11:50 PM | Likes Like |Link to Comment
  • Why No Investor Should Own GLD [View article]
    It's a little more complicated to compare prices because GLD and IAU had different inception dates and IAU also did a 10-for-1 stock split in 2010 around the same time it began accruing expenses at 25 bps vs 40 bps for GLD. If you look at a performance chart from 7/1/10 until now, you will see the effect of the lower sponsor's fee.
    Feb 22, 2012. 11:50 AM | Likes Like |Link to Comment
  • GLD Capital Gains Need Careful Tax Planning [View article]
    Two good questions.

    On GLD and IAU pricing: the original prices were set to equal approximately 1/10 of the spot gold price, but since the ETFs launched about two months apart from each other and have now been accruing expenses at different rates (40 bps for GLD and 25 bps for IAU), the prices have diverged. IAU also had a 10-for-1 stock split in 2010, so it's now closer to 1/100 of the spot gold price.

    The best way to compare would be looking at their performance. As of 1/31/12, IAU's 1-year performance was 30.52% and GLD was 30.37%.

    On Canadian CEFs, you're into some tricky tax territory. From the comments I've read from IRS officials, it's not at all clear that a QEF election (the process that allows the lower tax rate) would hold up to scrutiny since these funds clearly invest solely in precious metals.

    Also keep in mind that with CEFs, you also have to factor in premiums. PHYS, another popular Canadian gold CEF has been trading at around a 3% premium according to Morningstar. In my book, that's 300 bps more than anyone needs to pay to hold a highly liquid asset like gold.
    Feb 15, 2012. 11:23 AM | 1 Like Like |Link to Comment
  • What HDV's Track Record Tells Us About The ETF Industry [View article]
    Thanks for the comment, but I'm not sure I understand your point.

    AGG and SPY also have the same yield of around 1.9% right now. This yield parity is a bit unusual in recent time periods, but not unprecedented particularly given the severity of the financial crisis we're still digging out from.

    That high quality equities are yielding more than their IG bond cousins is one the reasons I point out about why I think HDV (and yes, other equity income ETFs) have been so popular. On a pure expected returns basis, it's reasonable to assume that high quality equities (along with their dividends) will likely outperform similar quality bonds over the next ten years barring any severe economic downturn.

    As for ETFs with higher yields, it's always possible to get a higher yield if you want to take on more risk.

    I just noticed that some of the links were missing from my post. Here's the Morningstar methodology and historical performance information: http://bit.ly/x7sLlM
    Feb 15, 2012. 10:49 AM | Likes Like |Link to Comment
  • What Indian Weddings And Gold ETFs Have In Common [View article]
    That's just inaccurate.

    GLD, IAU and SGOL are all organized as grantor trusts under the 1933 Act and are regulated as such. The trusts don't generally receive or hold cash, as they are creating and redeeming ETF shares in exchange for physical gold bullion. The trusts file regular reporting with the SEC including financial statements that are all available to review on line.

    The gold is the property of the trust (for the benefit of all the ETF shareholders) and is stored in bank vaults at HSBC and JP Morgan. It's subjected to multiple reviews and audits at random time intervals where each gold bar serial number is matched back to the ownership records of the trust.

    There may still be some cracks in the global financial system, but I've seen nothing to suggest that GLD is the next LEH.
    Feb 15, 2012. 10:21 AM | Likes Like |Link to Comment
  • What Indian Weddings And Gold ETFs Have In Common [View article]
    Good point Richard.

    Given that jewelry demand overall has not increased substantially over the the past few years while scrap recycling has, I agree that more mine production is likely supporting higher investment demand in the form of bars.

    This is also consistent with my observation in visiting gold vaults in London where the majority of the bars I saw were brand new--i.e. delivered directly from mine production.
    Feb 14, 2012. 11:09 AM | Likes Like |Link to Comment
  • Portfolio Check: Will Your Retirement Funds Last? [View article]
    I agree with @DVK definition of strategic asset allocation: setting target percentages for each asset class and rebalancing periodically to maintain the target allocation. This is not a "forever allocation;" one should generally be reducing risk and volatility when approaching and during retirement years, where big market swings can have more dramatic impact on a portfolio.

    Which brings me to the portfolio above. I need to take a look at Faber & Richardson's book to better understand their overall framework here in applying endowment & foundation (E&F) investing concepts to individual investors.

    My initial reaction though is that an allocation that only has 20% in bonds (and what about TIPS?) and 80% in risky assets can produce a volatile series of returns, especially if you are an older investor. One need only look back as far as 2008 to find a year when this allocation would have felt like falling off a cliff for anyone about to retire.

    My colleagues at work harass me sometimes about my "vanilla" (60/40) balanced index allocations I often use for comparisons, but I think many investors approaching retirement would have slept much better at night with more reasonable bond allocations in 2008.

    There are multiple challenges in applying E&F investing concepts to individual investors, but perhaps one of the most important is time horizon. E&F managers are generally investing with a very long time horizons, where individual investors have a more fixed retirement horizon that's not 100% certain for any of us, but it's also not perpetuity.
    Oct 8, 2011. 08:39 PM | 1 Like Like |Link to Comment
  • Rewriting The 4% Rule [View article]
    Thanks. What I was suggesting was for someone who had actually retired in 1965.

    Assuming he or she was around 65 years old in 1965 and didn't live past 95 (which happens to be in 1995 by coincidence of calendar years), would the income from a portfolio of d-g stocks and I/T bonds have produced stable REAL income levels through the rocky period of the 1970s without either eroding principal or failing completely like the 60/40 index portoflio with the 4% + COLA withdrawal rate?
    Oct 8, 2011. 04:26 PM | Likes Like |Link to Comment
  • Rewriting The 4% Rule [View article]
    Thanks for the lively dialogue.

    As @RAS points out, most US citizens have not saved enough for retirement, which is a much bigger problem for society overall, particularly with so many baby boomers nearing retirement during a period of slow growth and lower expected returns.

    Speaking of returns, thanks also for posting the links to @DVK's blogs from the summer on d-g investing. I had read them months ago, but went back and took a second look.

    The first blog is interesting because it looks at our "lost decade" -- where the US equity market has been both volatile and produced lower average returns for investors, raising the question: Is this going to be like 1965 or 1966? Would a retirement portfolio with a 4% drawdown fail in such a period?

    The short answer is we don't know yet, as we're only in the first 10 years of the current time period, but I'm sure for most people retiring around 2001, it's felt like a rough ride!

    I would also point out a couple things in assuming that a 4% rate will fail during the present time period: First, if investors had been broadly diversified in their equity investments over the past decade, they would have owned emerging markets, which unlike the US markets have produced above average positive returns over this period.

    Second, investors retiring in 2001 would have also likely had a sizable portion of their portfolio in bonds, which have rallied during the past decade as interest rates have fallen to historic lows.

    Even if an investor held no international stocks during the past decade, the average return for a 60/40 US equity and bond portfolio has been about 5% for the past ten years (as of 9/30/11), so it's not nearly as bleak as it first seems looking at equity returns in isolation during this period.

    Reading the remaining @DVK blogs, it occurred to me: Wouldn't an intriguing test be to use a set of rules to select a d-g stock portfolio as it would have looked in 1965 and see how it performed over the next 30 years in combination with a 40-60% allocation to bonds (as you get older, your bond allocation should generally be increasing)? This would be challenging analysis from a data perspective (getting historical dividend payments and corp action data over long time periods is time consuming work), but it would give a good apples-to-apples comparison for one of the two years where the 4% drawdown for a 60/40 index portoflio failed to last for 30 years.

    Given the hostile market environment of the 1970s where we witnessed severe bear markets and very high inflation, my guess is that many of these portfolios would still have been challenged in this time period to maintain sustained real income levels for 30 years.
    Oct 8, 2011. 02:55 PM | Likes Like |Link to Comment
  • Dividend Growth Investing: Understanding Style And Stock Selection Risks [View article]
    @NFC - Thanks for the comment and you're correct to point out sector risks. That was a key part of the point I was making in the first section: in order to implement an investment strategy focused on increasing dividends each year, you will need to add different risk characteristics to a portfolio -- style, size, sector and/or invidivual security -- that by definition move the portoflio away from the market portfolio.

    If that's an explicit objective, then I think a low cost, tax efficient ETF or index fund might be able to to accomplish the task better than performing individual security selection. That was the only point I was trying to make above.

    As I mention my previous comment above, I personally favor both a total return approach to retirement investing and broad market exposure.
    Sep 19, 2011. 10:03 AM | Likes Like |Link to Comment
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