Wednesday, March 29, 2006

UU's of the World Unite (well... at least against the stupid new logo)

Let's take a little test...

Look at the logo below and tell me what religious symbol this reminds you of...

Hmmm... let's see... could it be a freakin' cross!?!?!

Bill Sinkford, our denomination's fearless leader, continues his attempts to lurch UUism toward Christianity with this new logo. He has injected overtly Christian imagery (I'm still trying to understand this whole Good News crap is about) and made several comments to the press that lead me to believe he would be better suited to run the Presbyterians.

The lack of cross-like imagery is one of the reasons I (an atheist raised in a Jewish household) chose UUism several years ago. I'm thinking about getting my congregation to officially rebuke this this change to send a message to Boston... I doubt they care, but it would make me feel better.

Anyone else interested in supporting an effort to rollback the logo change?

UPDATE: The ChaliceChick has a great post about this development (it looks like I'm a bit late to the discussion)

Tuesday, March 28, 2006

Europe's Ailing Social Model: Facts & Fairy-Tales

Great article on the result (guess what... it's negative) of socialist-leaning economic models. The article does a great job explaining how Ireland's move to lower-flatter tax policy has driven explosive growth.

Europe's Ailing Social Model: Facts & Fairy-Tales The Brussels Journal
"Europe's well-intentioned model is not working because it does not pay to work after the taxman has taken his share. Europe is not innovating because it does not pay to innovate after the huge costs of complying with all the prescriptions, limitations and restrictions in all Europe's overabundant licences and autorisations. Demoralization is the real cause of Europe's stagnation. Europe's workforce is tired of being incessantly hindered in its task of producing wealth. Demoralization is the reason why ever more engineers, scientists and entrepreneurs flee Europe's tax misery. Paradoxically, the Old Europe of the West must now learn from the New Europe of the East, where after years of disastrous socialism, low and simple flat taxes are being introduced, luring investors from all over the world."

Monday, March 27, 2006

Hussman's Weekly Market Comment - Still Overvalued

Hussman remains bearish...

Hussman Funds - Weekly Market Comment: March 27, 2006 - The Big Chair:

"In short, the S&P 500 is richly valued on the basis of nearly every fundamental measure, including earnings when those figures are properly considered. The point is not to predict a near-term decline in stocks, but rather to emphasize that the long-term returns priced into stocks here are likely to be disappointing. Given that stocks are unlikely to produce much, if any, risk premium versus risk-free Treasury yields, it follows that a hedged investment position is unlikely to diminish long-term returns, though hedging is clearly likely to reduce risk. The case for risk management here continues to be compelling - perhaps not from a short-term trading perspective, but comfortably for longer term investors."

I wish I could find a flaw in his rationale... unfortunately, I cannot. We can only hope that any eventual correction will be mild in both duration and depth.

Monday, March 20, 2006

Hussman's Weekly Market Commentary - Thinking About Risk

Hussman Funds - Weekly Market Comment: March 20, 2006 - Everything Looks Good at the Top of the Channel:

"There's a quaint idea that has emerged in analyst talk these days, which basically goes - concerns about valuations, the current account deficit and other things aren't really important, because everyone has already looked at them, and markets don't usually respond to things that investors have already considered.

It's a nice idea, but it's preposterously wrong. It isn't the mere consideration of a risk that makes it benign. Rather, risks become benign only when investors have already acted on them. Anyone who remembers the 2000 market peak (from which, as it happens, the S&P 500 has still earned a zero total return after 6 years) will recall that rich valuations were very well recognized, but investors suspended or delayed acting on those valuations by reducing their speculation. For a known risk to become benign, you have to act on it and price it in. It's not automatic. Thought is not action.

Simply put, the main risks to the market generally are ones that investors have considered, but are also ones that they have not acted on. If you're a window-washer and know that your platform is slippery, thinking about it isn't enough to eliminate the risk. What makes the risk benign is that you tie a rope around your waist. The fact that investors have considered valuations, the current account deficit, and other matters doesn't in the least make those risks less important, because investors have not acted on those risks in any meaningful way."

Tuesday, March 14, 2006

Bill Gross's Dire Predictions For The Economy

Bill Gross is the Bond guru from PIMCO. Here are his latest thoughts on the US economy...

PIMCO Bonds - IO March 2006:

"If pensions, healthcare, (and defense), are going to drain such an increasingly significant share of GDP in future years, where does the money come from to promote economic growth of the sort that will pay for all of this? And how can we believe that America's value added/productivity advantage in the one sector where we remain competitive - technology - will continue if our math and science report card keeps getting a D+? Let's talk turkey; let's shoot straight, folks, without the requisite hyperbole that seems to define America�s modern age and current politics. We can't do it all - not just because our reach constantly exceeds our grasp but because this time we have exhausted our savings, lost our competitive edge and squandered our educational heritage. We have grown soft - THEY have grown stronger. We have lost a sense of why we have prospered - THEY have learned to replicate our work ethic of yesteryear. The solution as the Council rightly suggests, is to save more, get smarter, trade more freely and to maintain a competitive tax base. Well yes - thanks for the straight talk after all - but that is a plateful and it will require the long-term acquiescence of those strangers who will wish nothing more than to supplant us at the top of the economic/geopolitical totem poll. Instead, our solutions more likely will pursue an easier trail, characterized by currency devaluation, the inflating away of long-term pension liabilities, and the payment of rising healthcare expenses via higher personal and corporate taxes. Investment markets in the United States will not ultimately prosper under such an increasingly odorous environment. It is only sensible, therefore, to diversify globally. Sorry for the straight talk folks, but don't you think it's about time?"

Monday, March 13, 2006

Hussman's Weekly Market Comment - Reversal of Fortune

Hussman Funds - Weekly Market Comment: March 13, 2006 - Reversal of Fortune: "In March 2000, near the stock market's bubble peak, the median price/earnings ratio on the largest 50 S&P 500 stocks was 35.6, while the median P/E on the smallest 50 S&P 500 stocks was just 10.1. Currently, the median P/E ratios on the largest and smallest 50 stocks in the S&P 500 are 17.3 and 20.3, respectively. So while the valuation multiples of the largest stocks have dropped by over 50%, the valuation multiples of the smallest stocks have more than doubled. The same is true if we examine price/book and price/revenue ratios."

Thursday, March 09, 2006

Closed-End Fund Arbitrage

I ran across an article that mentioned an idea to arbitrage closed-end fund discounts against their ETF counterparts. Huh?

OK... let me break-down what I mean. Arbitrage is an investing behavior where you try to earn extra dollars by exploiting a market inefficiency while, at the same time, not taking-on any more 'market risk'.

Closed-end funds (CEF) are fixed (unlike ETFs and normal mutual funds that grow and shrink as investors enter and exit the fund) investment pools that trade like stocks. Their market price rarely equals their Net Asset Value (NAV) and, several months after a CEF launch, most trade at a discount to their NAV. One of the neat things about CEFs is that once they launch, their managers can invest without being burdened by money inflows or outflows - they managed a fixed pool of funds.

So the idea is to reduce your ETF or normal mutual fund holdings in an asset class where you can buy a deeply discounted CEF. This way, you keep your market exposure steady while looking to juice your returns by betting that the CEF discount will narrow as the market becomes more efficient.

Right now, Real Estate CEFs are trading at pretty big discounts (14-16%) to NAV. Here's a screen to see CEF discounts. Do you see NRI? It's one of the largest real estate CEFs and it's trading at an attractive discount. Remember, if the Board of NRI decided to liquidate or concert the fund to a normal mutual fund (two things that can happen when investors get ancy about big discounts) the fund's price would jump 17.6% (1/(1-discount)). I sold half of my IYR and invested it into NRI... same asset class risk + possible arbitrage earnings.

What are the risks?
  • CEF's are often thinly traded so liquidity can be a problem if you want to get in or out of the investment quickly... not an issue for me - I want exposure to this asset class long-term.
  • The CEF discount could reflect the illiquidity or poor valuation of the CEF's holdings. CEFs can hold non-traditional investments that may be difficult to sell and/or accurately value.
  • The CEF discount could be due to poor management of the fund.
  • The CEF discount could widen - for NRI, I'm hard pressed to believe that the discount could get much bigger than it currently is... I guess we'll see.

Note: this is not for the timid or the uninformed. Most importantly - this is not investment advice!

Monday, March 06, 2006

Hussman's Market Commentary: Cost of Hedging

Here's a passage from Hussman's latest...

Hussman Funds - Weekly Market Comment: March 6, 2006 - Cost of Hedging

In general, the total return on a fully hedged investment position is: the total return on the stocks owned in the portfolio, minus the total return on the indices used to hedge, plus the short-term interest rate implied in the hedging instruments. In other words, hedging only reduces returns by the amount that the major indices outpace short-term interest rates. (If say, 70% of the portfolio is hedged, you get the total return on the stocks in the portfolio, minus 70% of the index total return, plus 70% of the interest rate).

This is important, because based on the latest record level of S&P 500 earnings, the S&P 500 currently sports a price/earnings ratio of about 18 (the historical average multiple on fresh record earnings is about 12). Even if we assume that 5 years from now, the index merely touches a multiple of 16, and we also assume that earnings continue to grow along the peak of their 6% long-term growth channel, the 5-year average total return on the S&P 500 would only be about 5.44%. The implication here is even if the market continues to deliver positive returns in the coming years,
it would take only a modest normalization in valuations to make full hedging entirely costless. That is, it would be possible to entirely hedge the impact of market fluctuations without sacrificing anything in terms of total returns.

Thursday, March 02, 2006

Tom McMahon: What I Have Learned In 15 Years

Feeling sorry for yourself today? Tom McMahon isn't and I bet he has more daily struggles than most of us have over an entire year. Read the whole thing and be thankful for your life.

Tom McMahon: What I Have Learned In 15 Years:

If you search for The Stupid, you'll find The Stupid. If you search for The Worthwhile, you'll find The Worthwhile. If you don't get that, then it means that I've found The Stupid while looking for The Worthwhile. But you're The Exception, Bucko.

ER Portfolio Allocation - February 2006

As promised, here is my current asset allocation...

(click for larger image)

Overall, I'm pretty happy with the allocation and weights. Here are my thoughts on several of the assets:
  • Commodities - I'm pretty weighted toward oil due to my investments in HTE, PVX and PSPFX and I'm not aware of any instruments to get non-energy commodities into my portfolio. Even though I'm under my policy weight, I won't be adding more investment dollars to this asset class anytime soon.
  • Domestic Equity - I'm light here but since I haven't included my company stock options in this allocation, I'm not going to make any changes.
  • Timber - Once again, I'm light but I'm still a bit skittish on putting more money into a single investment like this. I may buy some more on a market dip.
  • Emerging Equity - I'm running heavy and I have one particular investment (SDA) that I should sell but it's got a sizable ($4k) short-term capital gain. It also happens to be in one of my kiddie accounts which makes my decision making even more difficult.
  • Equity Market Neutral - All of my EMN holdings are in Hussman's Strategic Growth fund (HSFGX). Even thought I'm over weighted, I'm really enamored (usually a bad thing when your talking about an investment) with this fund and I'm going to 'stay put'. I may even adjust my policy allocation to match my holdings.

This allocation is comprised of 26 stocks, 9 ETFs and 6 mutual funds. I'll detail my investments and their respective asset classes in future postings.

Wednesday, March 01, 2006

ER Portfolio Return - February 2006

Well... February wasn't a great month from a return perspective but I did accomplish a great deal toward my goal of getting to a more rationalized asset allocation. First, here are the stats for February:

  • February Return: -0.76% (Russell 3000 returned 1.27%)
  • 2006 YTD Return: 3.4% (4.65%)
  • Trailing 12 Month Return: 11.5% (14.1%)

Here's the long view...

I'll post my current allocation and major holdings in a follow-up post.

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