Career Change

I am in the wrong line of work and am going to make a change. I had this epiphany while watching Wealth Track with Consuelo Mack. One of the guests was Verne Hayden. Mr. Hayden has been making the rounds on TV for years. I know from past interviews he puts people in actively managed OEFs. I felt like his comments on Wealth Track gave more insight into what he does than what I have seen from him before. I don’t know what the reality is but I do know how I interpret what he said. He made comments about his not being good at knowing when to favor growth over value, he wants to hire managers that are good at that and other matters of portfolio construction and management. He has a lot of faith in the fund managers he “hires.” He related an anecdote about his clients complaining about the returns of one of the FPA funds run by Bob Rodriguez. His comment was long the lines of you’ll be glad you own it when the market goes down. This is perfectly valid logic for staying with a portfolio holding. I’m not sure, however, what value Mr. Hayden adds. It is reasonable to wonder whether someone with a basic entry level understanding could, over a long weekend assemble a truly diversified portfolio of mutual funds using funds with great long term track records. I have no idea what Mr. Hayden, or other planners doing the same type investment plan, charges for this type of service but someone in Mr. Hayden’s position probably has several hundred million in...

More Emerging Market Commentary

Regular reader, Jay Walker, who has a pretty good blog of his own, left the following comment on a recent post; I don’t see the same for many emerging markets – some, like Russia, Brazil and Korea are all expected to have earnings growth exceeding 12% or so this year, and all have a pe ratio (for their national stock market) below 12. In my view, that’s good growth, that can be acquired cheaply. A winning combination, I think. Better than investing in the S&P500 at 18pe with expected earnings growth maybe – maybe – getting to 10% this year. I think the right type of investor just HAS to look at some of the better emerging markets. A couple of things I would note; first most emerging markets are always much cheaper than the US. A market that always trades at ten times earnings is not that cheap, however, at when it is trading at ten times. It is cheaper, which is not a bad thing, but not necessarily cheap. A lot of emerging markets have traded in the single digits versus their earnings. In the last couple of years a lot of emerging markets have become more expensive, relative to the last 15 years. If you are a value investor, you may want to study this a bit more. I would also add that P/E ratios are not great predictors of future moves. P/E ratios do offer more room for cushioning the blow from a mistake or other downturn. Also important would be country selection. Jay mentions Russia, Brazil and Korea. The three are all much different...

The Big Picture For The Week Of February 26, 2006

Today our fire department personnel completed our pack test. In order to be a wildland firefighter you need to be able to hike three miles in 45 minutes while wearing a 45 lbs. pack (this is a picture from last year’s test). The pack weighed me down but I was able to do what I needed to do. As I was hiking, I wondered if there might be an analogy with the inverted yield curve weighing down the stock market. For now, stocks are doing what they need to do, the S+P 500 is up 3.3% year-to-date. At some point, with the 45lbs. on, I would not be able to go any further. At some point, with the curve inverted, domestic stocks will not be able to go any further. I do not know how far I could go wearing the pack. I do not know how long the market can keep chugging along with the curve inverted. Historically an inverted curve causes trouble six to twelve months out. For now though, the curve, although inverted, is not inverted by that much based on historical standards. The inversion seems to be slowly getting steeper but I’m not sure if the consequence is that a slow down/recession will take longer to happen. Inversion or not, it has been a long time since the last recession and if you still believe in economic cycles, then you have to believe a recession is somewhere on the horizon. Recessions, from a market perspective, are not something to be feared because they are normal. Regardless of the timing, you already know that stocks will...

Iceland Rhetoric Heating Up

A reader was kind enough to pass along the following commentary about the latest goings on with Iceland. Below that is my emailed response to the reader (subsequently proofread). Cracks in Emerging Markets Our Comment is by Eric Roseman, Investment Director of the Sovereign Society and editor of Global Mutual Fund Investor. Dear A-Letter Reader: “This time it’s different.” Those are the most dangerous four words in the investment business and always manage to surface towards the end of a secular bull market. Most recently, it was “supposed to be different” for technology stocks in the late 1990s, circumventing reality as prices soared to record levels each year from 1995 to 2000. And now, we have those wonderful emerging markets – only ten years ago coined “submerging markets.” From its low in October 2002, the MSCI Emerging Markets Index has skyrocketed 205% as every bourse from Brazil to Korea heads to the moon. Driven mostly by low interest rates, a boom in commodities and a series of credit upgrades for several high profile countries, the emerging markets are back. The bad news, however, is that we’re probably closer to the cliff at this point as record mutual fund inflows suggest the end is near. Coupled with manic speculation in many markets, namely Moscow and Mumbai, everyone is jumping aboard the money train. Cracks in the bull market have started to appear. On Feb. 22, Iceland’s currency and debt markets suffered a first-class pounding following a credit downgrade by Fitch Ratings. The rating agency downgraded Iceland’s local AAA-rated bonds to “negative” from “stable.” Iceland’s stock market managed to escape the...

NZT Followup

Yesterday, in my post about selling NZT, I mentioned that the trade may come as a surprise, especially a reader who emailed me a week ago about the stock. After I posted the article the same reader emailed me back suggesting that a stop order 10-15% below the high could have “prevented a lot of grief.” He is certainly not wrong and in hindsight my handling of the name is open to second guessing. His use of the word grief makes me wonder how much he has in the name. In a diversified portfolio some stocks will go down. It might be reasonable to question whether this person has too much in the name. This is constructive for anyone managing their own portfolio. If a 30% drop in one component would cause too much damage (this is subjective) to the overall portfolio, you have too much. Throughout the history of this blog I have been clear that 3% is the most I put into an individual stock. A 30% drop in one name with a 3% weight is a 1% drag on the portfolio. This does not cause me any grief or other emotion. Perhaps you can tolerate 5% in one name or perhaps 1%, either way getting in touch with this is very important if you plan to manage your...