New Years Eve Mish Mash


Long time reader Stephen Drone pointed us to an article from Tim Middleton dated yesterday in which he plans to use double long ETFs because he expects a big move up in stocks. I don’t think I have ever been a regular reader of his stuff and if I ever was I haven’t been for ages.

Per the article he is putting 10% in the double long S&P 500 (SSO), 6.2% in the double long mid cap (MVV) and 6.2% in the double long small cap (SAA). His logic is “…That makes both stock and bond prices compelling right now. Ergo, I want to own a ton of both. And thanks to leveraged ETFs, I can.” He mentions that sometimes these funds “misbehave” but that they would have done the trick over some period of time.

He may be right about the market or not in terms of direction but owning the double long funds may not work even if he is right. In 2007, which was an up year, SSO lagged the S&P 500 SPDR (SPY). The combination of up and down days will determine how a levered fund does over time and obviously there is no way to know ahead of time. That he makes the misbehave comment at all would seem to imply he knows that they may not capture the effect over a longer period of time yet he is buying them anyway.

I have picked on him a couple of time before (but it haven’t mentioned him since May, 2006) for a couple of different things. Everyone gets some calls wrong so I won’t rehash those but there have been a couple of instances where he made what seemed like huge sector bets with his ETF portfolio. Big sector bets are not a bad thing in and of themselves but I’m not positive he realizes he is making them. Here is a post of mine from September, 2005 about his Q3 2005 result in which I address this. I may have this all wrong about Middleton but it seems to me that if you are going to make a big sector bet in a portfolio you’re writing about you might want to explain why. People often get hurt more from not knowing they have made a big bet than the big bet itself.

I need some reader help. The week after next I am speaking at an ETF conference put on by IndexUniverse in Boca Raton, FL. The picture above is where we are staying, the Boca Raton Resort (swanky, huh?). Joellyn is coming along and aside from Barney Fife and Thelma Lou go to Raleigh jokes we are wondering if there is anything to do in or near Boca Raton besides shopping and dining. Any help would be appreciated.

The second picture is from the Roady’s Humanitarian Bowl played yesterday in Boise, ID. I don’t know about you but I can’t get enough blue turf football.

I was on CNBC yesterday afternoon. If you care, you can watch it here.

Lastly I’d like to wish everyone a Happy New Year. 2008 has been a rough one, very rough, for many people so hopefully 2009 can be better. On the topic of rough years I will recap 2008 for the portfolio in this weekend’s video. If you have been with me for a while you probably have some sense of how things have gone (I’ve been quite lucky) but I’ll try to dissect as best as can be done in ten minutes (the YouTube limit).

17 Comments

  1. I think the next big collective whine from the “investor” community is going to be these levered ETFs. There are people in high places who don’t even understand how these things work. I foresee a lot of what I see in the options communities I frequent. People start trading options with real money and don’t understand the vehicle. They guess right on direction, but wrong on volatility or speed and lose money. Of course, it is at that time that they begin to ask for help on how to “fix” the position. Some might take an active interest in understanding what they’re trading at that point (good, if not late), others will chalk it up to “stupid” options and walk away.

    Since options trading typically involves your broker asking you “do you know what options are”, this will deter some from even trying. Not the case with levered ETFs. I think a lot of pain will be felt by individual investors before the lesson is learned.

    Reply
  2. GOLF

    Reply
  3. BillB, happy new year and thanks for all the comments.

    anon, TY, I don’t play golf. haven’t played since i was about 13.

    Reply
  4. Roger – Q1 ’09 still worries me with redemptions from hedgies and not finding any institutional buyers to styme the tide of sales. On a more upbeat note thank you for all of your hard work. Have a great New Year, and I hope better times ahead for everyone…even the readers that leave thoughtless posts….

    Reply
  5. THe beahc

    GOlf, tennis, shopping, dining and the beach covers it I think. Weather can be iffy in Jan, sunny and 80 or sunny and 50-60 (rarely colder) both possible…..

    Are there any discounts at this conference for blog readers?

    THanks Roger and have a happy new year! Andrew

    Reply
  6. try fishing, great shopping bargains on palm beach consignment shops and pawn shops where victims of the Madoff scam have taken their possessions.the Atlantic beaches are great for swimming with different sharks other than the usual wall street types

    Reply
  7. maybe we can get some DeWalt equipment cheap!

    Reply
  8. I think the whine about levered ETFs started a week or 2 ago. The good thing is that I’m seeing mentions here and there about what a small percentage of market action they are.

    Here’s hoping 2009 is better than 2008 for our portfolios!

    Reply
  9. deep sea fishing

    never tried it but how about air boat ride of the everglades?

    short trip to the upper keys and snorkel the reefs

    Reply
  10. I strongly disagree with the comment on “blue turf football” (unless you were being sarcastic).

    I once tried to watch a Boise State home game on TV. Couldn’t do it. That turf was exactly the same color as their home uniforms (jerseys and pants). I couldn’t see their players on the field. The orange helmets helped somewhat but it was like watching the invisible man (men) play football wearing orange helmets. Freaked me out.

    Reply
  11. I do like the blue turf but maybe it is a case of being so repulsed that i can’t look away?

    Reply
  12. Deep sea fishing – I have tried it and it’s a gas if your captain gets you into a good area.

    Getting snockered while lying on the beach reading a good book and then getting more snockered at a good club playing whatever music you enjoy later on that night.

    What not to do – sit in front of the TV with your tongue hanging out watching CNBC! 😉

    Have a great time.

    DE

    Reply
  13. Middleton has written about the pitfalls of 2x instruments in the past – he understands how they work.

    My disagreement with Middleton is his market timing strategy: gut-instinct. I find this especially dangerous because there is no method for exit if he is wrong.

    Reply
  14. True, but normally it’s a core and explore thing. Part of his portfolio never changes except for rebalancing. Other parts change as you noted.

    Reply
  15. Tom,
    Do you have a link that shows this? I cannot find an article. I just find it really hard to believe that someone who understands this vehicle would recommend it for a long term holding … speculative or not.

    Reply
  16. I thought he wrote a longer/more descriptive article about this once upon the time, but maybe this is what was lodged in my memory banks:

    http://articles.moneycentral.msn.com/Investing/MutualFunds/4WaysToRecessionProofA401k.aspx?page=all

    Rydex Inverse OTC2X Strategy(RYVNX), which pits itself against the Nasdaq-100 ($NDX.X), is ahead 28.5% in three months, likewise a bit more than twice the loss of its target. Because of the way these funds are designed, they are very faithful to their objective on a daily basis, but they tend to wander over longer periods because of the compounding of returns. A fall of 10% followed by a 10% gain, for example, doesn’t return you to parity — it takes you to 99% of parity.

    Reply

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New Years Eve Mish Mash


Long time reader Stephen Drone pointed us to an article from Tim Middleton dated yesterday in which he plans to use double long ETFs because he expects a big move up in stocks. I don’t think I have ever been a regular reader of his stuff and if I ever was I haven’t been for ages.

Per the article he is putting 10% in the double long S&P 500 (SSO), 6.2% in the double long mid cap (MVV) and 6.2% in the double long small cap (SAA). His logic is “…That makes both stock and bond prices compelling right now. Ergo, I want to own a ton of both. And thanks to leveraged ETFs, I can.” He mentions that sometimes these funds “misbehave” but that they would have done the trick over some period of time.

He may be right about the market or not in terms of direction but owning the double long funds may not work even if he is right. In 2007, which was an up year, SSO lagged the S&P 500 SPDR (SPY). The combination of up and down days will determine how a levered fund does over time and obviously there is no way to know ahead of time. That he makes the misbehave comment at all would seem to imply he knows that they may not capture the effect over a longer period of time yet he is buying them anyway.

I have picked on him a couple of time before (but it haven’t mentioned him since May, 2006) for a couple of different things. Everyone gets some calls wrong so I won’t rehash those but there have been a couple of instances where he made what seemed like huge sector bets with his ETF portfolio. Big sector bets are not a bad thing in and of themselves but I’m not positive he realizes he is making them. Here is a post of mine from September, 2005 about his Q3 2005 result in which I address this. I may have this all wrong about Middleton but it seems to me that if you are going to make a big sector bet in a portfolio you’re writing about you might want to explain why. People often get hurt more from not knowing they have made a big bet than the big bet itself.

I need some reader help. The week after next I am speaking at an ETF conference put on by IndexUniverse in Boca Raton, FL. The picture above is where we are staying, the Boca Raton Resort (swanky, huh?). Joellyn is coming along and aside from Barney Fife and Thelma Lou go to Raleigh jokes we are wondering if there is anything to do in or near Boca Raton besides shopping and dining. Any help would be appreciated.

The second picture is from the Roady’s Humanitarian Bowl played yesterday in Boise, ID. I don’t know about you but I can’t get enough blue turf football.

I was on CNBC yesterday afternoon. If you care, you can watch it here.

Lastly I’d like to wish everyone a Happy New Year. 2008 has been a rough one, very rough, for many people so hopefully 2009 can be better. On the topic of rough years I will recap 2008 for the portfolio in this weekend’s video. If you have been with me for a while you probably have some sense of how things have gone (I’ve been quite lucky) but I’ll try to dissect as best as can be done in ten minutes (the YouTube limit).

Leave a Reply to Stephen Drone Cancel reply

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