Barron’s And Naked Puts

This week’s Striking Price column profiled a do-it-yourselfer who very successfully maintains an account with 10-12 positions of naked puts. Based on what I read it seems like most positions are about 20 lots in size. The way the numbers work out the margin requirements are about $125,000 and the premiums taken in work out to an annual return in the mid 20%’s on the minimum maintenance requirement for the positions. The article devoted a little space to the what can go wrong part of this strategy but I would have like to have seen a little more. I don’t doubt the success of the investor profiled but the way the article was written it made it seem like he was taking a tremendous amount of risk by way of being over leveraged. The minimum requirement for a naked put is usually about 20% of the cost to buy the stock. So if I read the article correctly it seems the investor in question is controlling $500,000 worth of stock with $100,000. The downside of this is a drop in the market. If the market goes down by 3% a $500,000 account would go down in value by $15,000. That same $15,000 hit to a leveraged $100,000 portfolio is obviously a 15% hit. This only comes into play, however, if you buy back the puts or get assigned. Bottom line is be careful with the...

The Big Picture For The Week of July 31, 2005

I am concerned about how much optimism seems to be out there. This is not a call to get out but after a great July there seems to be a fair bit of giddiness about stocks. A 3%-4% back slide would not shock me. That would take the SPX down to 1190-1200. This is just a gut feeling and I think the market has a shot of seeing 1270 sometime this year. I don’t know that it will finish the year that high but we might get there and that would probably be a point where I would slightly reduce exposure. Here is a link to a good article at Bloomberg.com about emerging markets. I have been a big believer in the asset class for a long time. The big thing here that the article might allude to, but I’m not sure, is that over the next few years I think capital previously earmarked for US equities will migrate overseas in search of better growth. Developed Europe has been a slower growth region for a while and I believe the US is headed down the same path. Investment capital will seek out better opportunities which to me means emerging markets. I mentioned, earlier this week, that most clients have 4%-5% to emerging markets. This is not an unusual number amongst investment managers. I think in the next few years 10%-15% will become the norm. This would mean massive inflows into the asset class. A massive inflow should result in higher prices. I am writing this post early Sunday morning while I am watching Tivo’d Fox Business shows from Saturday....

Austrian Coverage

Today on CNBC Europe they put this chart up showing the extent to which the benchmark Austrian ATX Index has outperformed the Dow Jones Stoxx 50 which is a broad, European,large cap index. Simon Hobbs, the show host, then went on saying they want to do more coverage of Austria and he asked for viewer help. He said that a lot of firms in the US might actually have better access to Austria than they do in the rest of Europe. So I think we may see more attention, one way or another, given to what is going on in Austria. In general terms more attention might be expected to lift equity prices but it has had a nice run so an immediate reaction is not clear to me. I first wrote about Austria last November as an investment destination and have mentioned it a couple of times since. I view it as a low impact way to play emerging markets for clients that are not comfortable with a normal emerging marker weight. The idea is that Austrian banks are financing a lot of the growth and expansion in central and eastern...

$35?

I stumbled across an old article about covered call funds on The Street.com. As I read through I saw a reference to a fund in the group called the Eaton Vance Tax Managed Buy Write Fund (ETB). Like all articles that mention specific securities it had a link to a quote, commentary and research. So I clicked on the research link to see what would be there. You can click here to see for yourself. The link took me to a page at the Reuters web site offering a two page report that costs $35. Two or three pages to analyze a CEF makes sense to me but $35? I can’t imagine someone’s insight about one CEF is worth half that. I am hard pressed to think they are selling too many reports like this for $35. Is it me? Maybe it is me. Maybe people are lining up to buy this type of report but I don’t get...

Morningstar Writes Back

I heard back from the author of the Morningstar report on VWO that I wrote about on Thursday. His name is Dan Lefkovitz and he was very cordial. He answered my questions about his report and I will paraphrase his replies and try to analyze the logic. He said that difference in performance is mainly attributable to EEM having Russian exposure, VWO managers choose not to have Russia in the ETF. OK so no Russia? Anyone else think that not having Russia causes a big style drift and misses a big chunk of the asset class? I think there may be less to the Russia argument than meets the eye. I counted Russia as having a 4.22% weight the following are the top four; Lukoil 1.79%, Surgutneftgaz 1.28%, Norlisk Nickel 0.38% and Vimplecom 0.32%. I may have missed some in my total but ETFconnect confirmed that EEM has less than 5% in Russia.This is a chart comparing the four largest Russian components to EEM for the last year. Norlisk at a 0.38% weight is the only one in the top four that beat EEM in that time period. Any alpha added by Norlisk was more than offset by Surgutneftgaz, which lagged the fund by what looks like 25% (again I am eyeballing the chart). Dan’s point about Russia stands up much better when you look at a two year chart. I didn’t paste it in to the article because formatting two pictures into one post is brutal or I just have poor blogging skills. All four names outperformed by a wide margin for two years. Given what might be...