This is a stock market blog about portfolio management,foreign stocks, exchange traded funds and the occasional musing about my firefighting experiences. The point here is to share process

Small Cap Owning Large Cap, Mass Hysteria!

The title of this post is a play on the bit in the movie Stripes when Bill Murray talks about dogs and cats living together.

You probably heard about the niche ETF (naming names is difficult for compliance reasons) that essentially grew too large in assets to track its niche. It isn’t just a niche fund it is the small cap version of that niche. It became the tail wagging the dog. Creations had to be suspended and the market price swung wildly from the fund’s NAV. There was similar havoc wrought on the 3x version of the fund as well.


The fund sponsor will be able to change the index later in the year to move up in cap size so the fund will skew larger but still be smaller than the large cap version of the fund. In the meantime, the small cap fund will have exposure to the large cap version to hopefully allow it to function as an ETF until the index can be altered.

Is that a big deal, the small cap niche fund owning shares of the large cap niche fund? In this case, probably not. According to the correlation between the two was at 0.92 as of the close yesterday. Over the last two years the correlation has usually been even tighter than 0.92 so someone feeling they must have small cap exposure to this niche can probably still accomplish that now, and then after the index is changed to go a little larger.


I don’t take this as a story about ETFs failing, I take it more to be that owning ETFs requiring work. There is no such thing as set and forget, there can be set and monitor with a willingness to take action when needed. Whether this is an instance where action is required is up to the end user but anyone owning this fund should at least be current with the story.

Creative Destruction; It’s Kind Of A Big Deal

My latest post for Alpha Baskets looks at creative destruction as relates to the widespread closing of retail outlets and what the long term implications might be.

From the post;

As a bigger concept this is about creative destruction, a concept widely attributed to Joseph Schumpeter from the 1950’s. Creative destruction is what makes laptops and 60 inch televisions be dirt cheap (Moore’s Law is a derivative of creative destruction) and the list of industries that have been impacted is endless. People as consumers have mostly benefitted although it might be a different story for people as workers. Think about auto manufacturing which along with other forms of manufacturing are moving more to robotics and automation. We’ve all seen the posts on Facebook about fast food workers being replaced by kiosks as the minimum wage starts to move a lot higher.

Please click through to read the entire post.

The other day I mentioned wanting to learn about the economics of the off road racing that I’ve been taking pictures of. This is typical of the setup that many of the racing teams have creating a massive work area with equipment being packed away in the semi when they roll out. The prize money seems to be fairly small in relation to this sort of scope so maybe this is more about marketing for the big teams and a fun (and expensive) hobby for the smaller teams. I’m not sure yet.


Pro Buggy Class


Number 21, Rob McCachren, one of the bigger names in the sport.


Don’t Fall For The Fallacy Of Explanation

This week’s Market Update is posted at Alpha Baskets and includes the following;

We are fascinated by various spread relationships that serve as risk proxies. Long time market participants may recall the TED spread, also in years past AUDCHF, Australian dollar versus the Swiss franc, was just such a measure where, put in today’s terms AUDCHF moving up was viewed as the equivalent of risk on and if the cross moved down it was risk off. YTD AUDCHF is up almost 2.5% but it is down about 3.5% since late February. Dennis Gartman has talked lately about EURCHF playing a similar role but lately the market broadly has been following the yield spread between the French OAT and the German bund. As the spread gets wider it is thought that political uncertainty in the European Union is increasing while a narrowing spread is a sign of decreased political uncertainty. At the close Friday, going into the French election, the spread was at 69 basis points. It had been as high as 85 basis points in February. For some context, this spread has spent most of the last year in the 30-40 basis point range.

Please click through to read the entire post.

In the last year I’ve become very interested in taking pictures of trophy tricks (also known as trick trucks). The context of my pictures has been desert racing (long races). Over the weekend I went to see them in short track racing in the Lucas Oil Off Road Racing Series. On the short track these trucks are known as Pro 2 which are 2WD, there is also Pro 4 which are 4WD and a couple of other classes. The action is crazy, it is loud, the trucks fly (literally), fenders and hoods flop around and then fly off; it really is a lot of fun. The economics of it hard to figure. The big trucks cost several hundred thousand dollars and the hoods and fenders regularly fly off and get destroyed. They travel with semi-trailers, they make massive work shops, have huge crews, several of the bigger names race in more than one class but the prize money appears to be quite small, nowhere near enough to maintain the operation. There is sponsorship money which might be how all of this is paid for, I am not sure yet but it will be fun to try to learn about.



More flying


One of my “go-to” color effects


Being John Malkovich-Moment

A quick note;

Do you remember the movie Being John Malkovich, the one where John Cusack and his girlfriend go into Malkovich’s brain? Then along the way John Malkovich goes into his own brain? Yeah, it was a weird movie but it was funny too. The ETF business may be having its own Being John Malkovich-moment with the launch on April 20th of the ETF Industry Exposure & Financial Services ETF which is being sponsored by Toroso Investments and trades with symbol TETF.

It owns a good mix of companies including the parent companies of iShares and SPDRs but not Vanguard of course which is not publicly traded. It also owns a few publicly traded exchanges where ETFs trade, companies that make markets in ETFs, discount brokerages that offer their own ETFs, companies long known for traditional mutual funds but who are also getting into the ETF business as well as a couple of mega cap banks with tiny (for now?) ETF businesses and an index provider.

The bank exposure is big enough that the fund may not end up being immune from interest rate risk but that remains to be seen.

A 1940 Pontiac


Being Disciplined 90% Of The Time Won’t Work

My latest post for Alpha Baskets is up and includes the following;

A common criticism of indexing is the extent to which the index tilts more and more toward growth as the bull market matures because the growthier, high fliers go on a run of outperformance later in the cycle (this is historically how it has worked). Those are the same types of names that stand to go down a lot, really a lot, during bear markets. It is a good bet that most of these types of stocks will bounce back to new highs in the subsequent bull market but it is at points of maximum pain the poor decisions are made.

Please click through to read the entire post.

A type 6 (brush truck) from a neighboring department


A 1936 Ford I drove by the other day.


Dropping off one of Walker Fire’s trucks and saw this.