Day: April 18, 2014

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Stocks & Industries

  • Invest In Stubs, Spin-Offs And Liquidations For Alternative Returns?http://t.co/ccezep0K9Y?Cites a Gabelli article http://t.co/xTrqEfmQeq $$?Apr 19, 2014
  • Real Estate Management Better Than Owning Real Estate??http://t.co/IFaDLiwTRa?Sometimes yes, sometimes no. Definitely adds more leverage $$?Apr 19, 2014
  • Wells Fargo Securities Lending Lawsuit Ends in Settlement?http://t.co/w3lSY4Cw8D?Low margin business that can go badly wrong in a crisis $$?Apr 19, 2014
  • Makani, a $GOOG subsidiary makes an airborne wind turbine that dramaticlly increases power generation efficiency?http://t.co/0Fug49o7gC?$$?Apr 18, 2014
  • Google to Buy Titan Aerospace as Web Giants Battle for Air Superiority?http://t.co/HjJ8wKtnjM?Makes me think $GOOG has 2much $$ 2spend?Apr 18, 2014
  • Profit Tastes Like Chicken in Hunt for Cheaper US Meat?http://t.co/drgQbwEiKR?With recent rise in beef & pork prices people substitute $$?Apr 18, 2014
  • Roads Versus Rail:The Big Battle Over Public Transportation?http://t.co/ydBxEglexC?Makes case that American will own fewer cars in future $$?Apr 18, 2014
  • Barclays Ups $LNC To Buy, Says $MET , $PRU Are Undervalued – Stocks To Watch?http://t.co/c7yNaVZqdp?Stock Market sensitive insurance cos $$?Apr 18, 2014
  • Bidding War Looming for Aspen? Analysts Say Don?t Count On It?http://t.co/iMotqyAgHv?Offer 4 $AHL looks pretty full 2me, dont look4more $$?Apr 18, 2014
  • Biggest LBO Demise Poised to Put Oncor in Play?http://t.co/d30djwOa5M?Buffett is unlikely 2 enter into bidding in a competitive sale $$?Apr 18, 2014
  • Target of Naked Short Sellers Is Angry, Confused?http://t.co/I3ZZDn5JNp?@matt_lavine takes on imaginary naked shorting in $LPHI $$?Apr 18, 2014
  • Radioactive Waste Is North Dakota’s New Shale Problem?http://t.co/BiMkO0ZdgK?Significant amounts of low level radiation from radium $$?Apr 18, 2014
  • The death of mortgage lending?http://t.co/u8uQBvZCuS?Loan yields must rise in order to compensate for higher required capital at banks $$?Apr 19, 2014
  • Kochs? Flood Insurance Opposition Becomes Campaign Issue?http://t.co/b1iuvoVhZK?1 of the few businesses the Kochs’ aren’t in is insurance $$?Apr 18, 2014
  • Office Markets Strengthen Where Tech, Energy Jobs Are?http://t.co/sESuHUeAVr?Helps explain the spottiness of commercial RE prices $$ $CMBS?Apr 18, 2014
  • Labor Shortage Threatens to Bust the Shale Boom?http://t.co/R1TctaTelD?Can’t find a job? Consider learning to weld; monotonous but pays $$?Apr 18, 2014
  • Koch Brothers Net Worth Tops $100B as TV Warfare Escalates?http://t.co/XgH0M6CNIR?Almost as wealthy as extended Walton family $$ $WMT $SPY?Apr 18, 2014
  • Big Banks Ramp Up Business Lending?http://t.co/83dMAPIQia?Signs of life spotted in big corporations, but r they just buying back stock? $$?Apr 18, 2014
  • How Can Yahoo Be Worth Less Than Zero??http://t.co/sr3owwkyNE?@matt_levine argues a breakup of $YHOO makes sense even if core biz loses $$?Apr 18, 2014
  • Wal-Mart Undercuts Rivals With New U.S. Money Transfer Service?http://t.co/a4vq0HYALi?Useful if u need 2 transfer $$ inside the US $WMT $SPY?Apr 18, 2014
  • How Chick-fil-A Spent $50M to Change Its Grilled Chicken?http://t.co/Q9kpXoSIbF?The marinade matters, but the grill design was the key $$?Apr 15, 2014
  • Small US Colleges Battle Death Spiral as Enrollment Drops?http://t.co/nHRhO4Gc1R?Too much capacity & affordability is a problem $$ $APOL?Apr 14, 2014

Outside the US

  • China GDP Gauge Seen Showing Deeper Slowdown?http://t.co/ntIxxdXcpO?If China increases consumption GDP growth will fall faster still $$ $FXI?Apr 18, 2014
  • Housing Trouble Grows in China?http://t.co/Z4tKUuqLFd?Overbuilding by Real-Estate Developers Leaves Smaller Cities W/Glut of Apartments $$?Apr 18, 2014
  • Suddenly, Europe Is Taking a Harder Line on Russia Sanctions?http://t.co/MnzxvMP3pe?Nations can solidify when they face a common threat $$?Apr 18, 2014
  • Las Bambas Copper Mine Purchase Shows China’s Still in the Hunt for Commodities?http://t.co/h1cqGERGCu?China may not b changing much $$?Apr 18, 2014
  • Forgetting How to Speak Russian?http://t.co/D0UwT6unki?Among former Soviet republics knowing Russian is less important for business $$?Apr 18, 2014
  • The Middle East War on Christians?http://t.co/BW1NwCAXuH?Israeli Ambassador 2 UN argues Israel is tolerant of Christians, not like some $$?Apr 18, 2014
  • Britons Struggle to Save for Home Down Payments as Prices Surge?http://t.co/M6vH0vDlDs?Space is constrained in London & foreigners buy $$?Apr 18, 2014
  • US Said to Warn Money Managers of More Russia Sanctions?http://t.co/rB8AUQTsnc?Putin knows Iran survived worse sanctions; Russia tougher $$?Apr 18, 2014
  • China Sentences Four Activists on Disturbing Public Order Charge?http://t.co/Tx95rrhWsb?Mostly, US has rule of law, China has rule by law $$?Apr 18, 2014
  • US govt isn’t perfect, but in principle the govt is subject to the Constitution & laws, & not merely able 2 use law 2 enforce its will $$?Apr 18, 2014
  • Frontier Fund Buyers Find It Pays To Look Under The Hood?http://t.co/JQ6khwYllJ?2much $$ is being thrown @ frontier mkts; crowded trade $FM?Apr 18, 2014
  • Why iShares? ?FM? Is About To Get Better?http://t.co/4FiqlfW0YS?Diversifies out of Middle East, but frontier market vals r stretched $$ $FM?Apr 18, 2014
  • Putin’s 21-Year Quest to Be Russian Guardian Began in Estonia?http://t.co/5oelLBHCmN?Father was betrayed by Estonians in WWI, almost died $$?Apr 15, 2014

Market Dynamics & Fundamentals

  • Bridgewater Founder Says 85 Percent Of Pensions will Go Bankrupt?http://t.co/YknEmyGgfJ?9% pension returns required, 4% is most likely $$?Apr 19, 2014
  • The Fitch Fundamentals Index Dashboard?http://t.co/OzI6KWUFfs?Interesting little utility 4 understanding where we are in the credit cycle $$?Apr 19, 2014
  • Rich Start-Ups Go Back for Another Helping?http://t.co/ZbFbpLVgmM?When capital is plentiful, bad decisions get made. expected returns low $$?Apr 18, 2014
  • Stumbling S&P 500 Reaches Worst Stretch of Election Cycle?http://t.co/zgJTynu2od?Interesting timing, wonder whether past is prologue? $$?Apr 18, 2014
  • How a 56-Year-Old Engineer?s $45K Loss Spurred SEC Probe?http://t.co/3HfdH2aqxK?Always read the risk factors in the prospectus or 10K $$?Apr 18, 2014
  • High-Speed Traders Said to Be Subpoenaed in NY Probe?http://t.co/2qxmrxeVd7?What level of technology is legitimate 2 gain an advantage? $$?Apr 18, 2014
  • Nuggets of Corporate Governance Wisdom From Charlie Munger?http://t.co/gMFIE9jlRM?Also c this paper: http://t.co/033v0bgdYr $$ $BRK.B $SPY?Apr 18, 2014
  • Global stock rally: World market cap reached record high in March, &is $2.4T above pre-recession, pre-crisis level?http://t.co/iMq0IoBhch?$$?Apr 18, 2014
  • Speed?the only HFT advantage? Not so fast?Flash?Boyshttp://www.cnbc.com/id/101586488?Algorithms may also be an advantage w/price patterns $$?Apr 18, 2014
  • Investor Alert – Exchange-Traded Notes?Avoid Unpleasant Surprises?http://t.co/NqhUr2whsJ?A helpful reminder 2b wary of exotic ETNs $$ $SPY?Apr 18, 2014
  • Americans Sold on Real Estate as Best Long-Term Investment?http://t.co/La4UROU0ie?Helps explain y retail investors lose on average $$ $GLD?Apr 18, 2014
  • Destroying Smart Beta 2: Ground Rules?http://t.co/uecYqZLCEe?Smart beta is a trendy but vapid concept, factors should be part of alpha $$?Apr 18, 2014
  • Gross Loses to Goldman in Hot Bond Strategy as Pimco Lags?http://t.co/VWv7UC72bS?Series of bad bets makes Pimco a laggard as AUM flees $$?Apr 15, 2014
  • Trillion-Dollar Firms Dominating Bonds Prompting Probes?http://t.co/RXZNkNwtFs?Concentrated markets can lead to bond pricing distortions $$?Apr 15, 2014

US Politics & Policy

  • What’s the Matter With Illinois??http://t.co/wmDiyWDN1e?They r the exemplary state for shortsightedness & corruption $$?Apr 19, 2014
  • Heartbleed Hackers Steal Encryption Keys in Threat Test?http://t.co/dYfezfXe8A?>6 people were able to extract private key of a website $$?Apr 19, 2014
  • Elijah Cummings, W/IRS, Targeted Tea Party Group True The Vote?http://t.co/TE5A1zTM0y?I live in his gerrymandered district; kick him out $$?Apr 18, 2014
  • Yellen Lays Groundwork for Rules on Short-Term Credit Markets?http://t.co/z03MWlpsqI?Fed doesn’t regulate the banks well, y try 4 more? $$?Apr 18, 2014
  • Schooling on a ‘Debit Card’?http://t.co/wwixbB0pqy?Arizona created a program so that special needs kids can get specialized schooling $$?Apr 18, 2014
  • IRS Among Agencies Using License Plate-Tracking Vendor?http://t.co/HTs5aEMNtK?Howard County Police use it & catch people 4 old crimes $$?Apr 18, 2014
  • Wealth Effect Failing to Move Wealthy to Spend?http://t.co/R3vfD5i94J?Wealth effect, if it exists, is small, FOMC is pursuing illusions $$?Apr 18, 2014
  • NSA Said 2 Exploit Heartbleed Bug for Intelligence for Years?http://t.co/9XvcLX9ZTE?NSA quietly knows security vulnerabilities; uses them $$?Apr 15, 2014
  • The Wall Street second-chances rule: scandal makes the rich grow stronger?http://t.co/8HhscWJjMN?What does not kill us makes us stronger? $$?Apr 14, 2014

Practical

  • How well do you know your insurance policy??http://t.co/szp3G8H4kN?Know what is covered & what isn’t, how much is covered & options $$?Apr 19, 2014
  • Attention Shoppers: Fruit and Vegetable Prices Are Rising?http://t.co/MMdPOLry9A?As are meat prices & most food prices $$ #agflation?Apr 18, 2014
  • How to start investing?http://t.co/yGyziE8Tac?Good advice from a credible source $$?Apr 18, 2014

Other

  • El Nino Signs Detected, Presaging Global Weather Change?http://t.co/D1uDLS9aJ0?El Nino exists 2 give us something 2 blame when frustrated $$?Apr 18, 2014
  • More People Pick Elimination Diets to Discover Food Sensitivities?http://t.co/ftQkzs3PxP?Fad and Science of Not Eating Entire Food Groups $$?Apr 18, 2014
  • SAT Adopts Real-World Questions and Jettisons Obscure Words?http://t.co/Mspw9EG3OV?In 2016, changes from intelligence to achievement test $$?Apr 18, 2014
  • Scientists Make First Embryo Clones From Adults?http://t.co/e5qlwyiWwj?Cloned cells 2create early-stage embryos, matching DNA tissue $$?Apr 18, 2014

Comments, Replies & Retweets

  • RT @howardlindzon: Funds still paying up (I say silly overpay) for private over public, this is spooking IPO ‘s for sure?http://t.co/mclSd9??Apr 15, 2014
The Good ETF, Part 2 (sort of)

The Good ETF, Part 2 (sort of)

Posted on by David Merkel

About 4.5 years ago, I wrote a short piece called?The Good ETF. ?I’ll quote the summary:

Good ETFs are:

  • Small compared to the pool that they fish in
  • Follow broad themes
  • Do not rely on irreplicable assets
  • Storable, they do not require a ?roll? or some replication strategy.
  • Not affected by unexpected credit events.
  • Liquid in terms of what they repesent, and liquid it what they hold.

The last one is a good summary.? There are many ETFs that are Closed-end funds in disguise.? An ETF with liquid assets, following a theme that many will want to follow will never disappear, and will have a price that tracks its NAV.

Though I said ETFs, I really meant ETPs, which included Exchange Traded Notes, and other structures. ?I remain concerned that people get deluded by the idea that if it trades as a stock, it will behave like a stock, or a spot commodity, or an index.

What triggered this article was reading the following article:?How a 56-Year-Old Engineer?s $45,000 Loss Spurred SEC Probe. ?Quoting from the beginning of the article:

Jeff Steckbeck?didn’t?read the prospectus. He?didn’t?realize the price was inflated. He?didn’t?even know the security he?read?about?online was something other than an exchange-traded fund.

The 56-year-old civil engineer ultimately lost $45,000 on the wrong end of a?volatility?bet, or about 80 percent of his investment, after a?Credit Suisse Group AG (CSGN)?note known as TVIX crashed a week after he bought it in March 2012 and never recovered. Now Steckbeck says he wishes he?d been aware of the perils of bank securities known as exchange-traded notes that use derivatives to mimic assets from natural gas to stocks.

?In theory, everybody?s supposed to read everything right to the bottom line and you take all the risks associated with it if you don?t,? he said this month by phone from Lebanon,?Pennsylvania. ?But in reality, you gotta trust that these people are operating within what they generally say, you know??

No, you don’t have to trust people blindly. ?Reagan said, “Trust, but verify.” ?Anytime you enter into a contract, you need to know the major features of the contract, or have trusted expert advisers who do know, and assure you that things are fine.

After all, these are financial markets. ?In any business deal, you may run into someone who offers you something that sounds attractive until you read the fine print. ?You need to read the fine print.? Now, fraud can be alleged to those who actively dissuade people from reading the fine print, but not to those who offer the prospectus where all of the risks are disclosed. ?Again, quoting from the article:

Some fail to adequately explain that banks can bet against the very notes they?re selling or suspend new offerings or take other actions that can affect their value, according to the letter.

[snip]

?My experience with ETN prospectuses is that they?re very clear about the fees and the risks and the transparency,? Styrcula said. ?Any investor who invests without reading the prospectus does so at his or her own peril, and that?s the way it should be.?

[snip]

The offering documents for the VelocityShares Daily 2x?VIX (VIX)?Short Term ETN, the TVIX, says on the first page that the security is intended for ?sophisticated investors.? The note ?is likely to be close to zero after 20 years and we do not intend or expect any investor to hold the ETNs from inception to maturity,? according to the prospectus.

While Steckbeck said a supervisor at Clermont Wealth Strategies advised him against investing in TVIX in February 2012, he bought 4,000 shares the next month from his self-managed brokerage account. The adviser, whom Steckbeck declined to name,?didn’t?say that the price had become unmoored from the index it was supposed to track.

David Campbell, president of Clermont Wealth Strategies, declined to comment.

Steckbeck, who found the TVIX on the Yahoo Finance website, doesn?t have time to comb through dozens of pages every time he makes an investment, he said.

?Engineers — we?re not dumb,? said Steckbeck, who founded his own consulting company in 1990. ?We?re good with math, good with numbers. We read and understand stuff fairly quickly, but we also have our jobs to perform. We can?t sit there and read prospectuses all day.?

If you are investing, you need to read prospectuses. ?No ifs, ands, or buts. ?I’m sorry, Mr. Steckbeck, you’re not dumb, but you are foolish. ?Being bright with math and science is not enough for investing if you can’t be bothered to read the legal documents for the complex contract/security that you bought. ?I read every prospectus for every security that I buy if it is unusual. ?I read prospectuses and 10-Ks for many simple securities like stocks — the managements must “spill the beans” in the “risk factors” because if they don’t, and something bad happens that they didn’t talk about, they will be sued.

In general I am not a fan of a “liberal arts” education. ?I am a fan of math and science. ?But truly, I want both. ?We homeschool, and our eight kids are “all arounds.” ?They aren’t all smart, but they tend to be equal with verbal and quantitative reasoning. ?Truly bright people are good with both math and language. ?Final quotation from the article:

?The whole point of making these things exchange-traded was to make them accessible to retail investors,? said?Colbrin Wright, assistant professor at?Brigham Young University?in Provo,?Utah, who has written academic articles on the indicative values of ETNs. ?The majority of ETNs are overpriced, and about a third of them are statistically significant in their overpricing.?

So, I contacted Colby Wright, and we had a short e-mail exchange, where he pointed me to the paper that he co-wrote. ?Interesting paper, and it makes me want to do more research to see how great ETN prices can be versus their net asset values [NAVs]. ?That said, end of the paper errs when it concludes:

We assert that the frequent and persistent negative WDFDs [DM: NAV premiums] that appear to be driven by?uninformed return chasing investors would not exist to the conspicuous degree that we observe if ETNs?offered a more investor-driven and fluid system for share creation. We believe the system for share?creation is ineffective in mitigating the asymmetric mispricing investigated in our study. Hence, we?recommend that ETN issuers reformulate the share creation system related to their securities.?Specifically, we recommend the ETN share creation process be structured to mirror that of ETFs. At a?minimum, the share creation process should be initiated by investors, rather than by the ETN issuers?themselves, as we believe profit-motivated investors will be more diligent and responsive in creating?ETN shares when severe mispricing arises.

Here’s the problem: ETNs are debt, not equity. ?To have the same share creation system means that the debtor must be willing to take on what could be an unlimited amount of debt. ?In most cases, that doesn’t work.

So I come back to where I started. ?Be skeptical of complexity in exchange traded products. ?Avoid complexity. ?Complexity works in favor of the one offering the deal, not the one accepting the deal. ?I have only bought one structured note in my life, and that was one that I was allowed to structure. ?As Buffett once said (something like this), “My terms, your price.”

To close, here are four valuable articles on this topic:

So avoid complexity in investing. ?Do due diligence in all investing, and more when the investments are complex. ?I am astounded at how much money has been lost in exchange traded investments that are designed to lose money over the long term. ?You might be able to avoid it, but someone has to hold every “asset,” so losses will come to those who hold investments long term that were designed to last for a day.

Theme: Overlay by Kaira.