Brian Dightman

ETFs: Out of the Hole?

IndexIQ has an ambitions filing on their hands. I applaud their ideas, but in the absolute return space it is all about strategy and execution. Over the last few years I have used a combination of registered AR investments. Some quant based, some index based and some actively managed. At present, I am using two actively managed and one index based AR mutual funds for a part of my strategies with great success (one is manage futures based). I'll be watching the IndexIQ ETFs carefully.

Since QAI launched, it has significantly underperformed the AR mutual funds I use, but it is early.

One reality that investors need to accept with an AR approach based on ETFs, the manager of an actively managed AR mutual fund has access to a lot more investment vehicles and strategies than those found in the ETF landscape, even with the expanded listings of the last couple of years. This is a handicap that will be difficult to overcome, in my opinion.

Diversifying, Yes; Decoupling, No

I believe emerging markets represent the biggest economic attribute difference compared to the U.S., but information from some countries is suspect and the amount/variation of data considerable. I do think the general trend of increasing capitalism (at a time when it is decreasing in the U.S.), a rising middle class, and stronger monetary systems in emerging markets will represent outperformance versus U.S. equities over the next 3-5 years.

I track a large number of individual country and regional ETFs. I have noted that most emerging markets are showing a strong recovery and as a result I find little reason to use anything beyond EEM (or similar broad emerging market ETF like VWO, PXH, GMM, etc.) at this stage of the recovery. If we move into a full-fledged recovery, supplementing broad coverage with regional or specific country allocations may make more sense. This is an asset class, in my opinion, where additional diversification is helpful. Given the wide participation by emerging countries in this rally, at present does not seem to be a hindrance.

Turing to developed markets, I favor those countries with rich natural resources and a willingness to develop them. It is really disappointing the U.S. is not in his camp, we certainly have the natural resources, but policy is directing us in a different direction at present.

Australia and Canada are my two favorite. I also believe their currencies my rally as the U.S. $ looses the “flight to quality” momentum it is currently benefiting from. I think Australia’s proximity to Asia will serve it well as will Canada’s current account position.

I recently reviewed a bunch of developed market indexes and it was very difficult to find any that did not have large allocations to Western Europe and Japan, two areas I want to avoid at present. I did eventually find one, the First Trust Dow Jones Global Dividend Fund (FGD). I posted an Instablog on the ETF for those that are interested in learning more about it. It is thinly traded, so you need to control the order process which I detail in my post.

Disclosure: Long EEM, Long FGD

Hitting the Slopes: What's Up(ish) in Global Markets

Hi Richard. Thank you for the reveiw and comments, especially the why and when to own.

In terms of stock investments, I have a bias internationally right now. The developed countries that I like most include Australia (EWA) and Canada (EWC). I like their natural resources, Australias proximity to Asia, and their currencies relative to the dollar once the flight safety in the U.S. $ has run its course.

The slope on the 50 for EWA has just turned up, supported by a lot of volume buying in the rally that kicked off in early March.

EWC is trying to make a turn.

Sweden, (EWD) has also shown up on my radar.

Most of the European Countries and Japan have flat to declining 50MAs.

If an investor does not want to own the individual countries, they can check out FGD, which just happens to be a global dividend ETF that has heavy weights in my favored countries and largely avoids countries that some investors might expect to lag in the recovery. I posted in the Instablog section of SA for those interested in learning more. It is thinly traded so I offer some tips on how to enter a position.

On the Emerging Market front, I was leaning torward a regional ETF like the new iShares AAXJ, I liked the country weights, but I opted for EEM. This is an asset class where I think you can still approach from a broad level and then overwieght with inidivdual countries or regions.

I have a tool that can ranks securities based on closing prices in the short term relative to closing prices over a meduim term. This results in one of 5 trends (3 up, 2 down). Here are the current results for the 42 regional ETFs I follow.

13 - In Super Uptrend (including EEM)
13 - In Major Uptrend
16 - In Minor Uptrend

Note: ZERO Down Trends

I find similar results when looking at the 22 individual emering market countries I follow.

I have noted in market action since November, that many different individual emerging market countries have lead the short rallies. It just so happens that EEM holds a nice weight for many of those countries: China, Russia, Brazil, South Korea, South Africa, Taiwan (All in Super Uptrends) with India and Mexico (2 more top holdings) in Major Uptrends.

As this market matures, I expect to suppliment my EEM position with regional/country exposure, but EEM seems to be participating nicely at this stage of the recovery and offers additional diversification that can be very helpful in this part of the market.

Disclosure: Long FGD, Long EEM

The Tide Is Turning

You can try and nail bottoms with technicals and fundimtals, but neitheir will work consistently over time but they can help with your investment process. Remember, fundimentals are subject to manipulation and many technicals are subjective and rapidly changing.

The real key in this market, I believe, is what is your strategy. If you are a blind bull with a sloppy approach you may find yourself very dissappointed. If you are a naysayer unable to find reason to participate, you may wake up one morning to a market that is well past these levels and not to return for a very long time, if ever.

Siegel vs. Standard & Poor's

The S&P -Speigel debate brings up an important point. When using P/E ratios to evaluate how "cheap" or "expensive" a stock or market might be, you need to understand how the P/E was calculated. Analyst, informaiton agregators, etc. use different methods which is why you will see different P/E ratios listed by different information sources for the same company or market.

A great resource on understanding valuation tools, check out the book Active Value Investing by Vitaliy Katsenelson. He lays out a great framework for attempting to perform proper stock analysis.

Weak Performance for U.S. Bond Market

It seems to me that we are facing conflicting risk in bonds. Interest rate risk, which TBT can help address and default risk (corporates, mortgage backs and munis). While most yields are really low, the corporate and to a lesser extent the mortgage backed market seem like the only two places you can stay short and pick up a reasonable yield. But CSJ has a lot of financials and gets pulled down with stocks.

Right now my plan is to start with a position in BSV, add CSJ and then revaluate (LQD and HYG may become more attractive as we get closer to the end of the contraction phase). I also own some TBT and may add to the position if long Treasuries start to tumble.

Bond Expert: Wednesday Wrap

Good stuff John, thank you.

I'm having a tough time with my Fixed Income allocation. To keep interest rate risk low I am staying short. But to get yield, I need to own corporate bonds and defaults usually peak at the end of the cycle’s contraction. I don't think we are there yet.

My best ideas right now are BSV & CSJ; potentially adding LQD as we move further along. To protect against interest rate risk I own TBT.

I usually stay away from closed end funds, especially those that use leverage but try to keep an open mind. Mutual funds are a non-starter for me unless it is a new fund that will stay small (under a billion in assets).

I don't have the time or expertise to analyze individual bonds and allocation to accounts is cumbersome.

Any thoughts?

Why the U.S. Dollar Is Vulnerable to Decline Now

Here's my takeaway.

Currency "fundamentals" are very difficult to gage. Many currency strategies seem to be momentum based. At some point I may short the dollar or go long Canadian dollars (or another currency) based on technicals but I am more intrigued with the following:

I am shorting long Treasuries via TBT and will likely add to position if it can break $50. Over a trillion in new bills, notes and bonds being issued by the Treasury this year alone, not to mention the run up in long Treasuries in the 4th Qtr. I know the Fed can take inventory nobody else wants but eventually that will limit their quantitative easing strategy (buying other assets - primary debt paper - to inject liquidity into the economy).

Hard Assets: Oil, Base Metals, & maybe even Agriculture. China is busy buying up oil and metal supplies at the current price levels. The wane in industrial demand is not likely to be picked up entirely by global stimulus infrastructure spending. Once a global economic recovery has kicked off along with our growing global population, combined with more expensive and difficult extraction for raw materials, could send DBB and DBO higher, which I don't own yet but did during the last run. I would use DBA for the agriculture exposure. One caveat, commodity prices usually follow stocks as the business cycle returns to an expansion.

Presidential Starts: 1900-2009

Markets look forward. Yes, some of the decline can be attributed to problems coming out of the last administration. However, the acceleration of losses in response to new policy announcements by Obama and his administrations do not bode well for the U.S. economy going forward.

There are many factors at work here. The market may be disappointed that Obama has not really "change" his tune for the benefit of our economy. For example, he could lighten up on drilling restrictions and reduce our $700 billion a year dependence on foreign oil over the next 10 years. The Alt.Energy push is all well and good but a long way from producing a meaningful amount of energy. He skipped Nuclear too. How many plants is China building?

Also, issuing HUGE amounts of debt is a big part of the problem. There was no restrain in the stimulus spending and now we learn more spending is on the way. Apparently he felt a very large and fragmented effort would work better then a smaller targeted one.

The homeowner bailout has community reinvestment act support written all over it. I would have preferred a broader mortgage interest rate reduction effort and a recognition that if you can't afford to own, you should rent.

There is so much work to do in our economy as well as foreign policy challenges that to tackle healthcare at this point, seems again a little unfocused. I walked away from his speech before congress with to thinking, nothing has changed. All he wants to do is "tax and spend". I actually took out a position late the week before thinking Obama could really ignite the market with his policy efforts. Needless to say, I sold the day the after his speech.

7 Signs of an Economic Bottom

ANYONE, with half a brain can become essentially financially independent in this country in 20 years working a 9-5. All you have to do is be willing to give up new cars, expensive vacations, lattes, dinning out, new clothes, memberships, subscriptions, etc. Don't believe me? Take 20% of your take home pay; compound it over 30 years at 8%. Now take 5% of that amount. That is the amount of income you could pull from your savings without a high probability of running out of money in your remaining life. The point is, when you have savings you have options as referenced below. Unfortunately, we have been convinced we are spenders (just look at our governments plan), not savers (has Obama announced any program to encourage saving-besides saving underwater homeowners?) and when we don't get what we want we become whiners and now we have a spoon feeding government with the perfect medicine. Just come to daddy…

Be careful about how you describe the Wealthy. The attitudes and opinions of Warren Buffett and Bill Gates should have no influence on our tax policy. I love the example they set with their (and many other Americans) philanthropic efforts, but their level of wealth (and many levels below) should not be used to create tax policy on families making over $250k.

One thing people forget about the wealthy (small business owners and savers included); they have options and don't have to work (or can work less). As such, a higher tax rate discourages work and investing by them. So they take time off until policy makers realize that a small percentage of the population will always be the engine for job growth (except the flip the switch government job engine, paid for by tax revenue of the wealthy, but wait...they are not producing as much...oops).

We will be much closer to an economic when we have evidence of the following:

***Real estate prices have stopped declining
***Unemployment has stopped rising

All the other numbers at this point, are secondary, IMO.

Unfortunately, because our economy is based predominantly on consumer consumption (approximately 70%), if Americans do start taking their personal financial future seriously by saving more, a recovery from the bottom will require a lot of patience (I don't expect this to happen, partially because there is little incentive to do so).

Fortunately, there will be ample investment opportunities for the counter recovery policy the current administration has proposed, and you don't even have to short a stock!

The Ecology of Investment Strategies

Thank you for the refreshing perspective. I cut my teeth at the brokerage arm of a global bank and realized what a golden opportunity MPT adherents provide those investors that are willing to be more adaptive.

The vast number of tools, vehicles, and information sources available today give smaller managers plenty of munitions. But as you stated, you have to know the capacity constraints of your strategy.

Will SPY Reach 2002 Levels?

Thanks Richard, I enjoy your work. I have found using P/E’s to establish entry points in broad market positions difficult. For example, if investors wait for PE multiples to arrive at or near 15 (your approximate as reported P/E average), they may find the market has left them behind. In the last bear market the as reported P/E did not hit a low until the end of 2006 at 17.4, well after markets advanced from lows hit in late 2002.

I realize it was the day you wrote the post but we are essentially now at 2002 levels and I find the current environment tempting. I raised cash throughout the first part of 2008 and experienced only small declines in strategies for the year. I do expect more downward pressure on U.S. stocks base on the contraction in consumer spending that is likely to stay with us until the employment and housing situations improve. I’m not sure we will get to a level where the P/E on as reported earnings hit 15. My concern is that with huge amounts of cash sitting on sidelines when the market does start to move it is going to do so swiftly and may consolidate at a higher level. In summary, I would argue the risk level for starting to re-enter the market at this level is fairly low. We have had a healthy 50% delince from market highs. Can it go lower, sure? If it does it is not likely to stay there for long...unless we are a repeat of Japan in the 90's. Proceeding with caution.