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Lucas Krupinski's  Instablog

Lucas Krupinski
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I have been working in the fields of Estates & Trusts, Tax Planning and Charitable Planning for several years now. It was from this turn in my career that I developed an interest... no... an obsession... in investing. Reviewing client account statements and seeing the end results of the buy... More
  • The ripoff of using ETF's.
    So many investors, and posters on Seeking Alpha, have flocked to touting advantages of ETF's, and an article on another website regarding the merits of ETF based investing got my mental wheels churning, so I wanted to present an alternate view on them, which goes as follows:

    There was a question regarding why Wall Street would have created ETF products, in light of already existent index mutual funds? True, the fees got cheaper, but unless you're a pension plan or endowment, the difference between a 0.09% expense ratio on an ETF and a 0.19% expense ratio on an Index Fund is mostly meaningless. So why did they create them? They found a way to sucker investors into paying trading commissions on products that previously didn't have them.

    Look at Vanguard. Their index funds already had incredibly cheap expense ratio's. And the ETF's are just different share classes of those funds. Though they were some of the most capitalized mutual funds in the industry (and best performing, if you agree that 90% of professionals under perform the indicies), they weren't very recommended by Wallstreet, who received no trade commissions from them, and received negligible fees from Vanguard (compared to distribution fees they'ed receive from non index funds with higher expense ratios).

    But now, Wall Street (and brokerage firms) have a reason to market index based products; they tout the intraday tradability as the advantage of ETF's over index funds, but that simply means there is now commission revenue available to them that wasn't there before.

    Simplest breakdown is this:

    You buy an index fund for $1000. The annual expense is just $1.90. If there's a 60/40 fee sharing agreement between Vanguard and the Broker, the broker receives 76 cents per year for letting you hold that investment.

    You buy an index ETF for $1000. The lower expense ratio means a drag of just 90 cents per year, which goes solely to Vanguard. Your broker, on the other hand, gets the trade commission.

    So rather than receiving 76 cents from Vanguard, the broker gets its commissions. That could be $1, $5, or $10 per trade. If you make quarterly purchases, and pay $10 commission (at, say, Ameritrade) the broker gets $40 annually (in contrast to 76 cents). And if you engage in other strategies (selling covered calls or buying puts), guess what, that much more money available to the broker rather than if you'd just bought an index fund.

    To me, it's quite simple. ETF's are a farce for most investors.


    Disclosure: ETF positions as follows: Short on the following: ZROZ, FAZ, FAS. No long ETF positions held.
    Aug 21 12:37 PM | Link | Comment!
  • The decoupling of stocks vs. fixed income is really the decoupling of retail vs. professional investors.
    Seems a lot of ink (or rather, bytes) has been devoted to the subject, but i still feel like I'd like to chime in on what seems to be a very easy to explain development. For many years, investors were used to rational markets, where, when stocks went up, bonds went down, and vice versa.

    It doesn't seem to be the case any longer. Instead, there seem to be two distinct markets; the equities market, which is completely dominated by professional investors at this point, and the fixed income market, which is dominated in it's own right by retail investors.

    Looking at earnings, yields, etc, I'd say that the market as it stands now (within a +/- 500 point range) is neither overvalued or undervalued. The movements outside that range (i think) were caused by the movements of retail (mutual fund) investors, who, after seeing the 2001-2003 collapse, climbed back into the market in the waning days of the last boom. Once they were in, the markets reversed, and panic selling (again, mostly driven by retail investors) drove the markets too far down on the downside. It's been lamented since that the rally that ensued since is the largest rally to have occured with no retail participation.

    How do we know that it's the retail investors to "blame" for the carnage? It's pretty simple, I think. The "big boys" (institutional types), be they university endowments (think, Yale & Harvard), pension/retirement systems (CalPERS), and others (Berkshire Hathaway, for instance), they all stayed invested throughout the entire time. They simply are too big to get in and out of the market. So its not them that are causing big moves. Instead, it's the trample of millions of feet scurrying away from their equity funds and into bond funds.

    Which explains why yields are so stubornly low. We complain about the defecit and dependance on China, but as long as retail investors remain frightened of equities, Uncle Sam has access to incredibly cheap funds for borrowing. Likewise, retail investors feel daring are stepping further out on the risk spectrum and bidding down the prices of corporate bonds in the same manner. The whole time, they're oblivious to the risk that they've created, in that once equities appear "attractive enough", it'll be a mad rush to the door, just as what happened with in 2008 and 2009.

    The sad thing is that since Dow 7000, 8000, 9000 and 10,000 weren't attractive to retail investors, one can assume that they're waiting for higher prices before they buy in. So maybe they rethink their bond positions when the Dow is at 11,000. Maybe it's 12,000.  Either way, they're assuring themselves worse and worse future by waiting for higher prices to prevail.

    The money flows are all very easy to track via mutual fund inflows and outflows. And that explains the "volumeless rally" that commentators lament about. I mean, its really obvious with all the retail money crowding into bonds, that stock volumes will have plummeted.

    This isn't a forecast. I don't know where the markets heading. But right now, it seems to be fairly valued based on corporate earnings. If those earnings decline, so will the market. If those earnings rise, so will the market. But right now, i think the riskiest place to be is in fixed incomes, which are ripe for a stampede out if retailers get their courage again.


    Disclosure: No positions mentioned.
    Aug 04 11:54 AM | Link | Comment!
  • Holding my breath, shorting a gold producer

     

    For the last several weeks, months really, one of the big items in the news has been gold's run up. I'll admit that at a few times I've been bullish on the metal, and did in fact own Goldcorp when it was trading at $22, and also held IAU during the time that gold ran from 600 to 900 an ounce. I'm not saying that to say I'm a great trader, but to point out that I'm not simply bearish on the metal just to be bearish.

    But these days, if feels like gold has detached from anything fundamental about it's value. To hear commentators on CNBC talking about their kids wanting to invest in gold, it strikes me with the same alarm bells I felt when I moved to Florida at the height of the housing boom, where waiters at restaurants would also point out that they were flipping properties on the side.

     

    That said, I recently opened up a short position on Goldcorp (NYSE:GG). I'll possibly start looking for smaller producers to short as well, but overall, i'm still going to maintain the long bias in my portfolio.

    People complain about the fiat nature of our currency, and clamour about gold and its "intristic" value. They don't note that gold, for all intents and purposes, is also a "fiat" store of value, only being valuable because people around the world feel that it's valuable (just like dollars).

    But stepping back and looking at it more objectively, what use is gold? 12% is used for industrial purposes, and the rest is either made into jewelry or stored in the form of coins and bars, in either bank vaults or personal safes. Unlike other commodities, which you can either wear (cotton), eat (corn, cattle, etc), or get energy from (oil, natural gas), or even other precious metals (silver, for instance, which is used for a plethora of industrial uses), gold is relatively useless, only having value because people expect it to.

    I haven't done the math, and perhaps I should, but people point out that a 10 year investment in gold would have outperformed the S&P. That's basically a measure of the market from the peak of the dotcom boom, to a level 50% above the market bottoming off of its recent crash. But i'd like to see the results of an investment in gold since the 70's when the dollar decoupled from it, and from it's previous peak during the 80's. I think the results will be radically different, especially once you account for dividends thrown off by the S&P. It'll be something to revisit.

    But in the mean time. I'm probably too early to the party. I'm okay with that, so long as shares of gold producers remain easy to borrow. Being a fan of David Swensen and Warren Buffett, I'll point out that the time to buy things is not when they're at peaks and everyone is ecstatic about them. Again, since gold produces nothing, to me, it seems like it's the same game of hot potato that was played out in dotcoms and housing in the last decade.

    I won't proclaim to be the next big investment star. I'm a little guy. But people bashed meredith whitney when she made calls against Citigroup. People bashed David Einhorn when he bet against Lehman Brothers. And John Paulson was decried when he began shorting subprime mortgages.

    The short story, I think, is that people are risk adverse, and they've crowded so much into perceived "safe" assets (gold, oil, treasuries), that they've made them incredibly risky. It's not happening yet, but when rates raise, people will find their long term Treasuries plummeting in value. And when the level of fear in the market has tappered down, people will likely be selling their gold in order to jump back into equities. I just can't see this ending well for a lot of things, but gold in particular.

    Go ahead, bash away.

    Published originally on my Covestor page

    Disclaimer: Currently short GG
    Nov 27 12:29 PM | Link | Comment!
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