German Chancellor, Angela Merkel is no pushover. Not only is she the most powerful woman in European politics, she’s the most powerful European leader, period. So you have to wonder what kind of response Greek Prime Minister, Alex Tsipras was expecting when he demanded war reparations over Nazi war atrocities when he met with the German premier this week. Whatever his expectations, he received a frosty ‘Nein’ from Merkel, who told Tsipras that ‘in the view of the German government, the issue of reparations is politically and legally closed.’
Making your dollar go even further
If you’re hankering after a trip to Europe – exploring the ancient architecture of Rome, climbing the dizzy heights of the Eiffel Tower in Paris or visiting London’s fashion hot-spots, this may be the best time to go.The strength of the dollar is already impacting the price of foreign travel, helping US travellers stay and play for up to 20% less than in recent years. Read more…
In the footsteps of Vikings
It’s often said that ‘you are what you eat’ – if it’s true then new evidence suggests that rather than aiming to imitate the southern Europeans in their Mediterranean-style diet, we should, instead, be eating like Vikings. The Scandinavians already have our admiration for their model prisons, schools and healthcare system – not to mention gritty noir thrillers – but they’re now grabbing the attention of nutritionists who believe that following the New Nordic Diet could help us all to lead healthier, longer lives. Read more…
What price customer service?
It’s a small world – and bad news travels fast. Out of the billions of transactions that take place globally every day, it’s inevitable that some will go wrong and complaints will surface. As an increasing number of these transactions occur online, customers often don’t have the opportunity to resolve problems face-to-face and are likely to take to social media with their grumbles. So what’s the best way for a business to handle complaints and should we be putting our faith in review sites for a fair evaluation of a company’s reputation? Read more…
When is whisky not scotch? When it’s Japanese, of course!
Traditional scotch-lovers, avert your eyes! In a move that’s sure to baffle Scottish producers, Suntory’s Yamazaki Single Malt Sherry Cask 2013 is the first Japanese whisky to win the Whisky Bible top spot, displacing the Scottish whisky brands that have previously dominated the rankings. Scottish whisky has led historical sales of the spirit with recent winners in Jim Murray’s annual ‘Whisky Bible’ including seriously good malts from Old Pulteney and Glenmorangie. But this year Scottish producers are eating humble pie with all of the top five positions going to non-Scottish brands. Why? Read more…
We are wrapping up a wonderful third quarter tomorrow with large US stocks up over 16% YTD. Sure, Europe and Emerging Markets were not as stellar, but diversification is as important as ever. Tech stocks are leading the way which should be no surprise–the bull market is getting long in the tooth and dividend tax rates could jump come 2013.
Why should we expect a great Q4? There are as many dour econo-headlines as upside surprises coming at us, you say. We agree. But look no further than 2004 as your guide. A controversial President went up against a lackluster opponent and won. The status quo brought positive market returns before and after the election. 2008 reared its ugly head a lot later. Obama is a different case study compared to Bush. The current President may try to sunset the 2003 tax cuts depending on how the Senate race turns out. That’s probably the more exciting election to watch. Stocks won’t like that, plain and simple. We look forward to the debates to prove Romney isn’t Kerry, but we are not holding our breath. Meanwhile, remember that Obama has the Fed at his disposal to juice economic indicators long enough to at least last through the November vote.
We should see large US stocks return over 20% as a group this year. The prospect of hitting 1560-1570 on the S&P 500 is very real simply through peer pressure alone. The 2007 high is on every trader’s radar and the technical picture is all clear for stocks to at least touch these levels soon. This is a bit like reading tea leaves, but psychology is an important component of short-term market returns. Bringing the market back to pre-recession levels is a wonderful story I see grabbing headlines as the election approaches. Maybe Obama will then release a secret tape where he says “You’re welcome one percenters, now go home, pretend you have a fever and forget to vote.”. The reality is that managers will be chasing returns as Q3 comes to a close and that is powerful stimulus in itself to give this rally afterburners. Anybody who thinks 20%+ returns are unicorns forgot the 1990s.
Don’t expect an October without some bumps in the road, but a bountiful harvest awaits investors when all is said and done.
We wrote in January “any material pullback that could make 2012′s chart look like a V or W on renewed European default or earnings concerns is a buying opportunity.” The correction is here, live and in person with global markets retracing 2012’s gains to date. The V can certainly deepen further, but this is the time to begin putting some of the cash you have on the sidelines to work.
The timing of the bottom of this correction is irrelevant and don’t expect to get it right. Just start putting 10-20% of your cash to work on days when the market is down over 2%. If we fall just another 5-7% from here, I will advise swapping out your boring, broad ETFs for something more fun like 2x or 3x leveraged ETFs and emerging markets exposure with more upside.
Corrections are psychological animals and we are definitely in the midst of a Euro-led psychosis. The faster Greece is resolved (stay with Germany’s austerity plan or leave the Euro) and Spain performs an Italian-esque political and economic turnabout, the better. But since the timing of this correction is identical to those we saw in 2010 and 2011, we are in no big hurry to get overexcited that the worst is behind us. The US economy is in a rough patch driven by the confidence-killing psychosis across the Atlantic. Notice nobody is worried about France’s new left-leaning leader or the actual Euro currency which is still far from parity with the US Dollar. All this negativity will pass and the stock market will show its strong hand again as we get closer to the Presidential election. Markets cheer political deadlock so bet on Republican gains in Congress and another four years for President Obama.
The broad market has yet to go really parabolic which makes me think this rally hasn’t fully run out of steam, but it’s also no prerequisite to get a good 5%+ correction going. We don’t want to be reactive when a sell-off takes hold, so let’s mentally prepare to deal with this eventuality.
Now let’s begin with some fun ETF education. There is so much to know and so much fantastic information out there. You may be wondering where to get started and what ETFs make sense for you. Start here: http://en.wikipedia.org/wiki/Exchange-traded_fund. Then read on:
- Use Yahoo’s ETF tool to see funds in various categories: finance.yahoo.com/etf/browser/mkt
- Popular sector and US index ETF creator: www.spdrs.com/
- Popular Global/foreign ETF creator: www.ishares.com
- Leveraged ETF firm: www.direxionshares.com/etfs
- List of leveraged ETFs created by different firms with different levels of leverage: http://etf.stock-encyclopedia.com/category/leveraged-etfs.html
- Very cool firm creating equal weighted ETFs which are a great complement to any portfolio (this is how you can remove the Apple effect from your Nasdaq/Technology sector investments): http://www.rydex-sgi.com/products/etfs/content/equalweight.shtml
Whether you’re up 10% or 25% so far this year, it’s now time to play defense for a bit to protect those gains. Please eliminate any and all leverage. Maintain exposure to core broad market ETFs like SPY, RSP, IWM, and EFA. If you have extreme exposure to a single sector ETF like QQQ, XLF or XLE, tone it down. Emerging markets bets like VWO or EEM can remain, but take them down to a maximum total of 10% of your portfolio. Raise 5-15% cash if you feel the need now and we will add exposure to some leveraged ETFs like UPRO, TQQQ and EDC as opportunities present themselves during any correction. Once a correction is underway, we will discuss how investors with higher risk profiles can use a very small short-term volatility ETF position in TVIX to enhance returns.
My ETF portfolio is up 18.4% year-to-date thanks to some well-timed leverage, exposure to the tech-heavy Nasdaq 100 Index and emerging markets bets. Sure individual stocks like Bank of America, Caterpillar and Apple have posted 20-45% returns, but don’t get green with envy. They come with stock specific risk trumped by the diversification most ETFs offer. Want to analyze your performance year-to-date like the pros? Comparing your % return to the S&P 500 Index or your next door neighbor is a good start, but you should learn to measure your risk-adjusted return like an institutional investor.
Let’s start with the basic Sharpe Ratio: (rp – rf ) / sp:: In this equation, rp = the average return on the portfolio; rf = the risk-free rate; and sp = the standard deviation of portfolio return. The Sharpe measure is found by dividing the portfolio risk premium, or the return on the portfolio minus the risk-free rate, by the standard deviation of the portfolio. Compare that to the market’s ratio or those of your friends. You will need daily values for your portfolio to do this in excel – it’s very simple, just make one of your financier or engineer friends dinner and force them to help you with the calculations. Once you figure out Sharpe ratios, look up Treynor and Jensen ratios – these are other ways to measure risk-adjusted returns. Big returns aren’t very useful if they fall flat on a risk-adjusted basis.
Enjoy the long weekend and remember to protect the hard-earned gains achieved during this wonderful rally.
I have a wealthy friend who asked the following question today: What are the odds of Google and Apple hitting $1,000/share, respectively, in the coming 18-30 months?
I don’t have a clue, but it doesn’t seem too far fetched. Which stock will get there first? No idea. This is a great topic to remind ourselves about luxury goods from Econ 101. Between Google’s IPO in 2004 until 2007, investors couldn’t get enough – it outpaced the tech-heavy NASDAQ 100 index by 3-4x over that period. The higher the price went, the more investors demanded shares of GOOG.
This price action was no different than what you see with Louis Vuitton purses, Rolex watches, Ferraris, and trendy art. But in 2008, GOOG changed its behavior and began trading like a technology stock rather than a sought-after purse. Over the past three years, AAPL has traded in similar fashion with similar results. This week even as Eurozone worries returned to the forefront of market action, AAPL seemed to defy gravity.
High net worth folks (politicians call them the 1%) around the globe flaunt their Apple shares at parties like a gold Rolex or red Ferrari. Look at me, look at me. The more AAPL stock makes up of your liquid net worth, the cooler you feel now. This has nothing to do with ratios or earnings or any fundamentals at all since these folks could care less about them – this is about being cool and envied. I don’t know how to time when AAPL stops acting like a luxury good, but I bet it will someday sooner than later. Sadly, there just isn’t any reason to bet against it for now. When it stops acting special, you will know.
Meanwhile, I take the road less traveled. So long as the bull market is in place for 2012, I choose to own QLD or TQQQ which offer 2x or 3x the daily return of the tech-heavy QQQ ETF, respectively. Because AAPL is the single most influential stock inside the QQQ ETF now, these leveraged ETFs will better mimic its potential for continued ascent. If it loses its luxury luster along the way, even better.
If you’re optimistic that stocks will rise this year like I am and you believe some money will FINALLY rotate out of bonds into stocks to boot, buy asset management stocks. It’s a great way to play the financials sector if you dislike banks for what they did to your fellow Americans and still feel gun-shy about a real estate comeback over the next 1-3 years.
These businesses directly benefit from a rising stock market and the more it goes up, the more fees they earn, the more their client list grows. Plus they benefit from compounding just like you and I, which is amazing. These are pure, simple stock market plays – they are not brokers, they don’t fund private equity, and they are not venture capitalists. The following businesses have been beaten down 60-80% over the past 10 years, all have quality investment professionals and they deserve a good look from investors like you and I:
1. AllianceBernstein Holding LP (NYSE: AB). This is a great way to play a unque, independent asset manager that might get gobbled up by a big firm like Morgan Stanley or UBS as markets improve. This is also a baby boomer play since their market is older, high net worth individuals. The stock is down 82% in five years to a market capitalization of $1.7 billion with a very cheap P/E of 11.
2. Legg Mason, Inc. (NYSE: LM). This company provides services through a number of asset managers, each of which generally markets its products and services under its own brand name and, in many cases, distributes retail products and services through a centralized retail distribution network. They employ great people and manage tons of retail and institutional money. The stock trades at 19x earnings and has lost 74% over the past five years down to market capitalization of $3.8 billion.
3. Janus Capital Group Inc. (NYSE:JNS). Janus is a household name born out of the technology bubble. The firm survived and now thrives with a market cap of $1.6 billion even after a 59% haircut over the past five years. It trades at an attractive P/E of 11.
Buy all three proportionally for your portfolio’s financials exposure or pick one or two. I left the nitty gritty details out so you can do your own reading about them online and see if you find one more attractive than the other. It’s best to diversify within a specific sector in my view, but you make your own call.