ETFs: alpha-beta soup

http://finance.yahoo.com/etf/browser/rk?c=0&k=6&f=0&o=d&cs=1&ce=64

I hope this ETF link works. I ordered the ETFs by their Alpha and went down the list looking for low Beta for some hedge ideas. (predictably, high beta with high alpha were Emerging markets and Resource ETFs. nothing wrong with them, they're just not a hedge right now).
Low and behold I found some Utilities (XLU, VPU, IDU) with beta~0.4 with alpha above 10, and found some Consumer Staples (VDC, XLP) with beta~0.5 and alpha~5. When you look at the holdings for XLP (http://finance.yahoo.com/q/hl?s=XLP) you see some great names like PG, MO, KO, WMT, and BUD! Yes, alpha and beta are backward metrics, but look at their graphs relative to the S&P Index to see they have really made the difference in the last 2 months!
And then compare those against the Consumer Discretionary ETF XLY (with names like HD, TGT, DIS, TWX) over the last 6 months, you see a 25% net differential.

Of note, I also like Global Telecommunications IXP as a utility with a major telco in every region(T, VOD, AMX, TEF, BT, FTE, DTE, China Mobile).

At this point, I think XLP is the way to play a volatility hedge. Let me know soon, I think we have a short day of trading on Monday.

Buffet Strikes Again!

Not to idolize the man or anything, but the Oracle from Omaha has smelled an opportunity! His insurance company has been granted approval to start insuring municipal debt in New York state.

Bloomberg link

Shares of MBIA and Ambac Financial, two large bond insurers, dropped on the news. The market knows! I mean who are you going to trust, two greedy companies or W.B.? These two companies had it coming since they chose in the past to insure all types of debt without really checking the risk out for themselves and relying on the debt ratings agencies.

This whole bond insurance thing seems a bit odd to me anyways! If you buy a bond and think there is some risk of repayment then shouldn't you be compensated via a higher interest rate? I mean if you need to buy insurance then maybe you shouldn't be buying the bond in the first place. Similarly, if the debt issuer has a good reputation, then you don't need the insurance!

I suppose there maybe some instances where this financial engineering has a role but leave it to the investment bankers to take a good idea and leverage it to beyond the point of recognition - until it turns risk diversification into risk magnification. I've read of debt insurance companies like MBIA turning around and buying insurance (like re-insurance) on the policy they sold. This firm then also 'offloads' the risk to other players down the line, until someone at the end is 'long' the risk. The problem is, everyone of these insurance companies didn't realize that the underlying CDO had some toxic waste (i.e. subprime) in it. Every company down the line now suffers a capital hit and is at risk of downgrades. This has the potential for cascading failures as these insurance companies may have other policies with other counterparties that may not be 'subprime'

How much are those baby Berkshire shares anyways? Maybe this is the safe haven play during periods of market volatility?

Volatility: part 2 (of many)

I would rather put money in KO/MO than holding cash as I've been guilty over the years of having a high cash position dragging down my total returns. Besides, even after a $4K purchase, we'll still have almost $3K for true bottom fishing if the market really tanks.
When I say "volatile" markets, I truly mean both up and down, not just down. I think there are ways to make money in a nervous, volatile market in names like KO and MO. They are at their tops with high PE and such, but I see these names gaining favour as the nervousness continues. There's not much fundy analysis to do here. MO sells smokes and KO sells sugary drinks; simple, just like WB likes'em.
I think Arash also preferred to take a position rather than hold cash, but he may be on a warm beach somewhere sipping a mojito (with limited internet access).

GE and other thoughts

Holiday greetings to all! yes I've followed up more on GE and there's good and bad! Being a conglomerate has its benefits as they have refocused their business lines into energy and infrastructure which lends itself well to developing countries. Its GE Money division is a large US consumer credit division that is exposed to the coming credit default of many average American consumers. My feeling on this is there might be a better time to buy this conglomerate even though Jeffrey Immelt has swore up and down that they have a triple A rating on their corporate debt. Immelt even suggested at their latest corporate presentation that if their consumer banking division wasn't meeting expectations, that they would sell it. Conglomerates often sell at discounts to a sum of the parts valuation and I suspect that GE might in future suffer from this due to its extensive banking operations. This would represent a good arbitrage situation as I'm quite optimistic about its other operating divisions.

In terms of KO or MO, they're both trading at their highs for the year. I have no real preference. Are we expecting them to go higher with the expected volatility of the markets? Cash might be better during expected volatility either to buy more during dips or to sell positions at tops.

Happy Holidays!

At this moment Lulu is up to $49.40 and SLB is up to $95.60, so maybe there really is a Santa Claus ... rally.
I think we agreed to buy GE, but then there was some enthusiasm recently to buy KO/MO as a hedge. So this comes down to whether we believe the volatility is behind us and the markets are going up, hence buy GE, or the volatility will continue in Jan/Feb, in which case we should buy KO/MO. I think it's going to be the latter. Let me know your thoughts and I'll put in an order for later this week when the market re-opens.

In the meanwhile, have a very merry Christmas!

The winners are...

TD pulling out of ABCP bail-out? the SIV superfund not gaining much acceptance? It figures the greedy banks to cannot find a cooperative solution to save their industry. They need a system in which each bank acts upon their self interests. Oh wait, I think that's called capitalism....

Looks like TD and GS are going to win this battle.

15000 - 3600 - 4500 = 5900??

So with today's purchase $4500 of SLB, and $3600 of Lulu booked, somehow me and Arash calc'd that we had $5,900 left in the bank, when actually we have $6,900 left. Leave it to the math guys to mess up some simple arithmetic.
The point is we have enough cash to buy 1 and possibly 2 more positions over the next few weeks. I've started a very simple Google doc spreadsheet and with today's closing prices, we have gained 5% in NAV since we've started.
So we're off and rolling!

Volatility

With the markets in an uncertain pattern, I got thinking about volatility and how to play it. It seems with everyone on edge about interest rates, recessionary fears, and financial writedowns, that the market is exhibiting higher volatility. Does anyone know of a way to play this via the stock market or can you only buy options on the VIX?

the sky is falling!!

So this Nov drop has been somewhat baffling. Different sectors have gone, up, down, and sideways; but mainly down. I think I found a bit of a "safe haven" in names like KO, MO, MCD, and even PG. Yup, looks like a classic flight to safety in a nervous market. Look at their charts relative to the Dow for the last 6 months. (Don't be fooled by the March drop in MO, they spun off the Kraft shares). And it just so happens these are large US exporters. In particular, I like MO at this point as the classic recession-proof, defensive stock.

Prime positive

The boys at Goldman Sachs are good! Possibly evil but good. They started shorting CDOs and subprime at the beginning of the year and are on track to cover any losses the firm might have had to the subprime meltdown. These financial guys will sell a product to a customer as triple A and then turn around and short the hell out of it! Collecting fees the whole time of course!

WSJ article

Value vs. Growth

I have read a number of articles comparing value vs. growth strategies. Almost all of them suggest that growth has recently outperformed and should continue to outperform value in 2008. Take a look at this one for example:

Looking for growth stocks when there is not much growth

HSBC

I've taken Junk Bonds idea about profitting from collateral damage into this post. HSBC has held up better than most big banks. Even when compared to the big international banks, it's 6 month return has been better than UBS, Barclay's, and Deutche Bank. They still have exposure to the American subprime market but its stock price has held up better than the American banks. Do the markets think that their exposure or risk is less?

I haven't followed HSBC closely, but they are one of the world's largest and has a significant presence in H.K. as well as China. They are diversified throughout 76 countries. Not many banks operate in H.K. China, U.K., U.S., Asia, and Latin America. It's current market cap is about $200 billion US.

They've got a position in three Chinese banks and about 15% or their latest year operating profit was from Hong Kong. I see they're in the news today because they're buying a distressed Taiwanese bank.

I think this is one to watch especially if there is more credit fallout.

The GE decision

It seems I am the most resistant to GE as I find their financial exposure hard to fathom. But if the rest of the club is enthused about the US export and emerging market play, then I can join concensus. We should all take some leap of faith at some point.
One thing I have been impressed with is that as a closely followed conglomerate, the market doesn't seem to mind the bad news too much. They release some bad news and some smart analyst comes out and says, "yeah, we baked that into the price", and then the other lemmings.... I mean analysts come out and say "yeah, we knew that too!" And then GE's stock hardly moves (up or down).
I really like the US export play but I cannot think of a better company so maybe that's what we should buy. Are we all agreed to buy GE on weakness?

More Buffet

For those that didn't follow the link to the full transcript of the CNBC interview, I will post the best part in my opinion which has been alluded to in the last few posts here:

Becky: That's the most concerning view I've heard from you as long as I can remember talking to you.

Buffett: Yeah, but .. We will have ... I hope I live long enough to see a couple of recessions in this country. (Laughs.) At your age, you'll see 6 or 7 in your lifetime. It is the nature of capitalism to periodically have recessions. People overshoot. So, it isn't the end of the world. I mean, as a matter of fact, for an investor, you know, it turns out to be the times when you make your best buys. I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap.

The real thing to look at is how much you're getting for your money and not worry about what they're going to do next year. The American economy is going to do fine over time.

Becky: But when you start talking about that, are you comparing what's happening right now to 1974?

Buffett: No.

Becky: Do you think prices are as cheap?

Buffett: No, no, they're not remotely .. oh no, they're not within miles as cheap. But, you know, they may get cheaper. We'll find out. But if they get cheaper .. as long as you're a net buyer of stocks, which we are at Berkshire, we want them to be cheaper. I mean, if they reduce the price of hamburgers at McDonald's today I feel terrific. Now I don't go back and think, gee, I paid a little more yesterday. I think I'm going to be buying them cheaper today. Anything you're going to be buying in the future, you want to have get cheaper.

So the club and arguably most of us that are early in our investing careers, are so called net buyers, so we should relish a good market pullback. I know I do! What struck me even more was that Buffet doesn't get too fussed if what he has bought has gone down in price as long as he thinks he's still bought a valuable business, because he'll buy more cheaper!

I must admit that being a contrarian investor has led me on occasion to buy too early into a company that would continue to suffer losses. I have dealt with this in many ways including buying more cheaper, selling at a loss, and just holding on until it finally recovers. None of these are easy! Each one requires a good judgment as to the residual value of the business and it really tests one's psyche more than anything else.

Leading, Lagging, and Making money

(In keeping with my suggestion, I'm going to post more and comment less.)
It's true GDP and CPI are lagging measures, and bond yields and stock markets are leading indicators of a recession. So what? No one makes any money predicting CPI numbers. We make money in the stock and bond markets. So debating whether there is an "official" US recession coming or not is a rather moot point. Given all of the data, leading and lagging, we have to predict the severity of the slow down and decide how it's going to affect future earnings of companies; the true long term determinant of stock prices.
I guess the difference is I see the credit problems being contained in the financial sector; the housing market has been slumping for about a year, the subprime fallout started in July/August, and here we are in Dec with few signs (leading or lagging) of systemic problems outside of the financial system. Thus I believe there will be a soft landing, and there will be profitable investments at the expense of those panickers crying, "the sky is falling!"
There have been financial crises in the past (LCTM, Barings, Orange County, LBO/junk bonds, etc.), and those who have coolly assessed the possible outcomes, to step in when the the future seemed bleak have made the most money. By the time we, as amateur investors, decide it's safe to buy something, the pros have already gained 20-30% on us.

So what if LIBOR rates are at all time highs or central banks are accepting MBS as collateral? How does that affect lulu? I still see women crowding Lulu stores trying to find the best sizes and styles, and walking out with $300 worth of tights... and I bet not one of them have heard of LIBOR or MBS. :)

The Oracle Speaks

Here's a link to a recent Warren Buffet interview:

http://www.cnbc.com/id/22200828/site/14081545/

I like what he said about being a net buyer of stocks during recessions. If you're a net seller you might have a problem. I think most of us are net buyers right now.

TIming of SLB

Oh, I almost forgot. I've been trying to time the entry into SLB last week but the oil markets have been more resilient than I thought. With the threat of a US slow down, I believed that oil was headed lower and with the so-called hedgies in the game the drop would be swift but alas my readings of the oil leaves were wrong. I keep reading reports about production shortfalls and capacity constraints that will keep the oil markets tight so perhaps we won't have a better chance to jump in.

I read something interesting today about peak oil and this longtime oil expert (Groppe) blamed the rosy predictions of the IEA for the run up of oil to $99. He claimed that their (IEA) projections of non-OPEC capacity additions caused many OPEC nations to throttle back on production this year leaving us with a shortfall due to continued growth in demand. He also thought that oil prices of $65-$95 was consistent with peak oil barring any geopolitical disasters. Apparently there are 15 million barrels of oil/day that are burned to produce electricity in Africa/Asia that would likely switch to coal/NG given the opportunity due to the increased cost of oil. This would allow this oil to be used in higher value uses like transportation.

Overall the oil markets have been quite volatile but have shown persistent support in the high eighties. I think if we're patient we might have a better chance to pick some up cheaper than the close of $97.

LuLu: a cautionary tale

I thought I read all the Lulu news, but here's one I just found:

http://www.reportonbusiness.com/servlet/story/RTGAM.20071127.rmlulu1127/BNStory/specialROBmagazine/home/?pageRequested=all

It's a long one but gives good background and what to watch out for.

RoB always does a good job of presenting a balanced perspective so it's not just pumping a stock.

The Fed Decision and Moral Hazard

So I've been busy planning a little party so I haven't had much time to post but rest assured, I keep a very close eye on the markets. In particular, on a down day, LLL closed up $3.90 at $47.85, for a gain of 33%. That's what I call diversification! :) It could be the momentum traders or fund managers adding it for "window dressing" but I'm keeping a close eye on it for any weak signals.

Today's sell off, I think, represents one of the safest buying opportunities I've seen in a while. The speculators were hoping for a 50bp cut in the *discount* rate and got burned when they got a 25bp cut. The talking heads on the business news channels (aka economists, strategists, etc.) were saying the liquidity crunch in the financial sector will translate into a consumer recession. Unfortunately, this is not being supported by the numbers: GDP, CPI, retail sales, and long bond yields. They were praying for the 50bp cut to save their cushy xmas bonuses.
Frankly, I'm encouraged that the Fed has made a stand finally!! If banks repeatedly made bad risky decisions (CIBC?), they deserve to go down and the Fed should not save them. Unless there are some consequences, there is a problem of moral hazard at the banks. They will quickly forget the CDOs troubles and create new structured products with their new found liquidity to create another bubble.
This is the first time Bernake has made a courageous move and I think it sets the stage for a true recovery. The economic data is showing the Wall St. crisis is NOT spreading to Main St (sub-prime loans were made to lowest credit profiles). There's been a recession in US housing for almost a year, but the GDP is still growing due strong consumer spending, and strong exports (weak US$).
I think today was an over-reaction by Wall St "pros" hoping for an easy xmas rally. Some companies in certain sectors will continue to post profit growth over the next few quarters, and the markets should be heading up from here. I think these Wall st cry-babies will sell off some more for a few days, but this should give us some good entry points.
Again, I am recommending EEM as a high beta/alpha play with some good fundamentals backed by China, and Latin America. Are we all into buy that this week?

Misc links:
http://www.scotiamanagedcompanies.com/mcapp/home.do
http://www.claymoreinvestments.ca/ETFs/Public/etf/ETFHome.aspx
http://www.ishares.ca/index.do

I rediscovered the appeal of those split shares which eliminate the dividend (tax) drag of some of our favourite indicies. Compare SXT to the S&P/TSX 60 Total Return and you'll see what I mean.

Emerging Markets and GE

I've been reading more about GEs business and it really is a mutual fund of businesses including water treatment, energy generation, energy distribution, nuclear energy plant construction, offshore drilling systems, railcar locomotives, as well as NBC of course. Its market cap is second only to Exxon.

The following article http://www.reuters.com/article/tnBasicIndustries-SP/idUSSIN7166820071001

also highlighted the fact that it's emerging market business was growing at double the rate of its US operations and was forecast to grow at 20% a year for the foreseeable future.

I think despite its credit division, this is a good long term play on emerging markets, a falling US dollar, and on energy infrastructure. Most of these themes have been discussed in earlier posts.

LLL's Volatility

On most days LLL can be quite volatile, but yesterday I checked its price in the morning and it was over $42 and it closes at $36.95. Its day range was $36.6 to $42.90. If only I had the time and fortitude to day trade this on margin! Efficient markets or hyperactive traders?