Fri 20 Feb 2009

Friday Night Lights

Posted by Author under Music
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I apologize for the lack of updates recently. The past few days I’ve been very busy and didn’t have much time other than for quick Tweets during the day.

After this enormously stressful week, I decided to skip the usual chilly Friday night song. Instead I’ll go with a very uplifting, epic piece from the PC Sci-Fi shooter “Prey”. I think in times like these, when panic and fear runs wild among even the most battle hardened investors, it’s necessary to put yourself in the mood for the final showdown with an appropriate tune. Ladies and Gentlemen, I give you “Strengthened Resolve”:

 

Wed 11 Feb 2009

Mortgage equity accelerator rip-off highly un-serene

Posted by Author under Personal finance
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Yesterday when I came home I found a letter from my mortgage servicer in the mailbox, offering to enroll me in a so-called “equity acceleration” program. The idea is that if you make half your mortgage payment every two weeks instead of once a month, you can shave off years of paying your mortgage and save gazillions of interest in the process. All without refinancing.

Now, I’m always game when it comes to saving gazillions. You’d think that a simple adjustment in the payment schedule, which will probably take about five minutes max, should be available on the cheap. Well, think again. Despite several statements such as “It costs nothing to get started” and “You have nothing to lose and so much to gain”, there actually are some costs involved when you dare to flip the page and look at the fine print.

The one-time Enrollment fee is $ 295 (!) Whoa! What for? For clicking on a different box in your customer relationship software? But wait, that’s not all. Additionally you’ll be charged $ 5.42 per month for this incredible service! How did they calculate $ 5.42? Why not $ 5.76 or $ 4.77? What exactly is this monthly fee for, other than ripping you off because you didn’t pay enough attention? Don’t you just love these stupid fees?

Well, listen up, guys. If you like the basic idea behind these programs, save yourself these highly unnecessary expenses and create your very own “synthetic equity accelerator” program. Just make one extra payment a year toward your house and you’re done. Because this is exactly what these programs do. By paying every 2 weeks you make 26 half-payments a year, whereas on a monthly schedule you’d make the equivalent of 24 half payments.

Now, where is the easy button?

 

Mon 9 Feb 2009

The this, the that, and the other

Posted by Author under Scatterbrain
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Here are two noteworthy tidbits I came across today:

Oil-fund investors beware:

Matthew Hougan from IndexUniverse wrote a good piece about how the current contango in the oil futures market can severely damage your investment returns if you pick the wrong vehicle (such as USO).

Peter Schiff explains why he is actually right and the market wrong (so far)

“Guru” Peter Schiff successfully shrank his investors’ assets in 2008 by a much wider margin than the average markets. Miraculously this didn’t stop him proclaiming that his market forecast was actually correct. When several people then pointed out that despite of having had the right outlook, he still managed to lose more than half his managed assets, he felt compelled to write a gloomy diatribe, explaining why the markets got it wrong so far.

I have to admit, the guy has some nerve. But in a world where clowns like Cramer are heralded as investment experts despite plenty of evidence to the contrary, I guess there is also a place for failed gurus like Schiff.

 

Mon 9 Feb 2009

Honey, my Ultra ETF shrunk my assets (and how to make them work after all)

Posted by Author under Trading
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shrunkkidsBy now you’ve probably read in multiple places that Ultra ETFs are only a trader’s best friend, but shouldn’t be used for actual investing. Several articles in the financial news media, particularly on SeekingAlpha, already pointed out how in several instances both the Ultra Bull and Ultra Bear ETFs lost money for the investor.  If you haven’t heard of this phenomenon yet, then read this article and watch the video.

Now, it is also no secret that these products aren’t broken. They actually more or less do what they’re designed to. Their goal is to lever your daily, not your long term returns.

Let us look at a small example: An unlevered ETF starts out at 100 and then alternately loses and subsequently gains 5 % day after day. Over time this will result in you losing money in the underlying ETF: after 200 days you’d be left with $ 77.85.

Now let us look at how the two Ultra ETFs would have fared. The Ultra Bear, who is supposed to gain when the underlying ETF loses, would have actually lost way more and would end up at $ 36.60. How sad is that? You had the correct view and yet you lost your shirt. Interestingly, the Ultra Bull would also be around $ 36.60. So you’d have lost money on both funds, even though they did exactly what they were designed for.

So does this really mean that these two funds are only a trader’s best friend? Actually, no, they can still be used as a hedge for a regular long-term portfolio, provided that you do simple dynamic hedging. This means that at the end of the day you would have to take some profits if your Ultra ETF went up or buy additional units if it went down.

The mathematics of how much you’d have to buy or sell depend on your market outlook and your goal for the hedge and this is beyond the scope of this short post. I just wanted to point out something that I haven’t seen come up in any of the countless “Ultra ETFs are poison” posts all over the web.

 

Sun 8 Feb 2009

A scary visit to Lending Club

Posted by Author under General Observations
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Always searching for interesting investment opportunities, I came across the following loan request on Lending Club. I’m not a member of the page (yet?), but this particular story made my skin crawl. Read these following excerpts from a loan request for $ 8,000:

“This loan will assist in expanding my Forex (Foreign Exchange) company ‘Sovereign Wealth Company’ . Currently I have a total of 30 clients with a goal of 100 by the end of 2010 calendar year. Ninety percent of the capital received from will go towards the purchase of top tier computer hardware which will dramatically increase the speed at which I am able to analyze & execute orders on behalf of my clients.

In addition, I have already hired software engineers from several countries to create what might be some of the most dynamic trading software in the industry today. The remaining capital will go toward maintenance fee’s of the software. Currently my software executes the trades based on the changes in the market trend along with several other proprietary factors. The trading software performs at the highest modeling quality level of 90%. This simple means that for every 10 trades I place in the Forex (Foreign Exchange) market 9 will not only result in a profit, but will reach its intended profit target. <..>

Return On Investment: I plan to successfully fulfill my loan commitment via my company management fee system. The Sovereign Wealth Company Management fees are a hybrid fee system based on traditional hedge funds. In turn for successfully trading each client’s account the Sovereign Wealth Company receives 20% from profit made through each member’s account. To some people who are used to investing in a far less dynamic market place, 20% per month on profits may seem a bit over the top, but when you factor in that the Sovereign Wealth Company could produce account increases of 10% to 40% per month it’s all relative when compare to yearly fee’s charged by money managers in other industries.”

The sad thing is, this loan is already 31 % funded! Almost every other sentence should have made several red flags pop up for any reasonable human being, but apparently there are still enough people out there for whom common sense is not so common.

 

Sun 8 Feb 2009

New interesting high-yield ETF: “HYD”

Posted by Author under ETF, Trading
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Last week Van Eck introduced “HYD”, the first ETF for the high-yield municipal bond market. So far the only way to participate in this market was through mutual and closed-end funds. Both types typically charge outrageous management fees, and the almost mandatory leverage found in closed-end funds can make them behave like a penny stock when things really hit the fan. PIMCO’s closed-end offerings more or less imploded last year.

ETFs should always be the preferred choice for the serene investor when investing in any market, because of their tradeability, transparency, non-leverage, tax efficiency (for the most part) and usually low management fee.

High-yield munis have both lower default rates and lower correlation to equities than junk bonds. Additionally, they’re tax free. And to top it off, currently they’re trading at record spreads. So the question is: is this the beginning of something beautiful? I can’t claim to be an expert in this field, but I find the new offering intriguing.

The expense ratio currently is “only” 0.3 %. Mutual and closed-end funds typically charge well over 1 %. Geographically it seems appropriately diversified, but it does have a relatively high concentration in California and Florida (25 % to both States together).

What also disappoints me is the relatively high concentration in individual bonds. The top five bonds constitute 20 % of the portfolio; I’d have preferred a larger amount of bonds and lower individual weights. Additionally, the fund has a duration of 8, which is relatively long, so there is interest rate risk to take into account. On the positive side, the average yield-to-worst at the moment is 10 %, which is quite attractive, especially for municipal bonds (and keep in mind, this yield is exempt from federal taxes).

Without going too deep into it, I like this new offering a lot and will keep it on my radar. Read the investment brochure here.

 

Sat 7 Feb 2009

Friday Night Lights

Posted by Author under Music
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And once again I have to post the music update on Saturday because of time constraints.  But I hope I can make up for it by posting a really exceptionally well done piece today: “Iguazu” from Gustavo Santaolalla. Anybody who has watched “Deadwood” on DVD will recognize that this is the song from the title menu. It also appeared on “The Insider”.

Anybody who wonders as to why I mix an investment blog with certain music, be assured that there is method to my madness. I will go more into detail later on. For now, enjoy this musical masterpiece:

 

Fri 6 Feb 2009

Quick thought on banker bashing

Posted by Author under General Observations
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It has been a busy week and unfortunately I haven’t had time for any major posts since Monday. Tonight I’ll be out as well, but there is one thing on my mind that I’d like to blog about “real quick”, as Napoleon Dynamite would say.

Guys, what’s the deal with the banker bashing lately? It looks like everyone’s favorite sport is to make fun of Wall Street. Hey, let’s ridicule them and let’s cap their pay, so that “the taxpayer” doesn’t finance their bonuses. Who in the newsmedia is not happy to jump in and throw some rocks at those terrible ”fat cats?”

What usually doesn’t get mentioned is that it’s the taxpayer who’s ultimately responsible for this mess. Yes, you read that right. Not the bankers. Not the regulators. It’s all the people who decided to borrow too much money and then just walk away from their obligations.

Where are the deadbeat bashing articles? I can’t find any. Instead, when these idiots walk away from their homes because they are underwater, journalists and bloggers seem to agree with the deadbeat’s ”smart choice” to hand over the keys to the bank and leave them with the mess.

This may be a rational choice on a monetary level, but it makes me wonder, where in the world was their rationality when they bought the house in the first place? When they bought way too much house on way too little money? I’m not talking about people who suffer from unexpected medical emergencies or a death in the family, wiping out their savings or their income. I’m talking about everybody who fell for teaser rates, turned off their brains and bought that one million dollar home on an entry level salary.

Make fun of these idiots too, not just of the bankers or regulators. It’s the taxpayers who are not paying their obligations who are primarily responsible for this mess.  If you punish the bankers you’re more or less just saying that the average person is too dumb to think on his own. If you go down that path then maybe you should also do away with that whole democracy thing. If the average person is too dumb to do personal finance, how could he be smart enough to figure out who to vote for? In that case, restrict their voting powers to American Idol and everybody’s better off.

 

Mon 2 Feb 2009

Monday’s scatterbrain update

Posted by Author under Scatterbrain
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Sometimes I don’t really have good ideas for longer updates, but several shorter thoughts. I guess I need a new section for these scatterbrain updates. Maybe you guys get some ideas of your own out of them, but as always, do your homework first.

Single stocks (GE):

I’m generally not a proponent of single stocks, but GE is getting interesting. It’s almost trading at Book Value, which is around $ 10 a share. The company still makes money and yet the price keeps falling and falling, making it more and more attractive.

Preferred stock ETFs (PGX, PGF, PFF):

I like preferred stock ETFs at these levels. I’d prefer them to levered closed-end funds that have given up most of their discounts. Regarding the question which one to buy, they will all perform similarly. However, the most liquid one, PFF, can often be purchased at a small discount to NAV during the day, at least lately. The other two in comparison usually trade at premiums. That makes the choice a lot easier.

High Yield (PHK, PFN, PFL, HYG, JNK, PHB):

Some closed-end high yield funds are trading at ridiculous premiums to NAV. In 2008 PIMCO turned in a disastrous performance with most of their closed-end offerings. Many of their muni funds lost about 40 %, and their high yield funds did even worse. PHK, PFN and PFL got absolutely smoked, dragged down by their leverage. Rightfully they were trading at huge discounts towards year’s end. However, lately these discounts turned into huge premiums. People just never seem to learn.

If you want high yield exposure, buy a Vanguard mutual fund. Be careful with junk ETFs such as HYG, JNK or PHB. Most of them trade at premiums to NAV and they are usually concentrated in the most liquid names. If any of those companies goes down, your fund will take a sizable hit. I’d prefer the greater diversification offered by Vanguard.

 

Sat 31 Jan 2009

Quick thought on recessions

Posted by Author under General Observations
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Isn’t it curious how every single recession is labeled as the “big one”? Inevitably people start wondering if the current recession will lead to another depression. They’ve done so in pretty much every recession I can remember since I was born in the late 70s.

In the midst of every recession, laws and regulations are being passed to prevent the same problems from occurring again. But like squeezing a balloon on one end, only to see the air move to another end, whatever we do, inevitably different factors will cause the next recession. So yes, every recession is different. And every recession needs to be fought with different tools.

Every recession feels like the end of the world. Can anybody tell me the last time that people, while in the midst of an ecomonic downturn, did not panic? When was the last time a majority of people just huffed and puffed, checked their watches and said “Oh well, there is another darned recession, but well, it’s going to be over in a few months”? Or the last time magazines had cover pages which said “Don’t worry about this recession”? Neither can I.

You cannot take the fact that many smart people are concerned as your guideline to pull all your money out of the market. They were just as concerned after the tech crash. Can nobody remember this? I cannot for the life of me recall anybody saying “Don’t worry about stocks being cut in half and people being fired by the buckets. Just look at the real estate market, people are actually getting richer and richer”.  Only after the recession was over, economists started pointing out these factors and saying that actually it wasn’t that bad. But in the thick of it, pretty much nobody said anything positive. Just like today.

 

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