Personal Finance – Page 26

Don’t Strategically Default on your Mortgage

Posted on 9 January 201010 January 2010 by David Merkel

I like Roger Lowenstein; he is a bright guy.? I have reviewed several of his books, and would recommend to readers that they are worth buying.

But, I disagree with Lowenstein in some ways regarding defaulting on home mortgages.? I want to give some credit to my wife here.? My dear wife of 23 years, who I thought about many times while we were attending a wedding today (I could not sit with her because I was leading the singing), and who does not have an economic bone in her body, helped me think about the issues around defaulting on home mortgages.

There is a false notion that because firms default when it is in their economic interest to do so, so should homeowners whose mortgages are greater than the underlying house value.

First, firms can’t so easily enter Chapter 11.? How does Chapter 11 work for firms?? Two things must be true — a firm must not be able to raise cash to make a debt payment, and the assets of the firm are worth less than the liabilities.? If a firm can’t pass both tests, the bankruptcy court should refuse the filing, forcing the firm to sell assets to make a payment.

To use this analogy for defaulting on a home mortgage, it is one thing to take out a mortgage in buying a home, having reasonable margins for error, and then disaster hits, and the mortgage payment can’t be made.? It is quite another thing to have the capacity to make the mortgage payment, and default.? Corporations usually can’t get away with that (please ignore KMart); if they can make payments on the debt, they can’t go into Chapter 11 bankruptcy.

Bankruptcy primarily exists as a protection for borrowers who have suffered loss, leading to inability to pay their debts.? It does not exist to allow people with the capacity to pay to slip out of contracts, simply because the creditor won’t go after them because it is not worth their effort, or, they don’t want the negative PR.

Would you borrow from a relative and default, because you know they would never sue you?? Would that be ethical?? Taking advantage of the extreme kindness of others may be legal, but it is never ethical.

If you can pay, you should pay.? That the mortgage lender will not enforce their rights does not mean that the one who can pay but defaults is ethical.

Imagine a society where any can default at their pleasure.? My, but the interest rates should get high to reflect the possibility of loss from borrowers that could pay but won’t.

If you can keep your word, and make your payments, do so.? You entered into the mortgage agreement with no assurance of where housing prices would go.? That they turned against you is no reason to default; but if your ability to pay has declined, well, that is another thing — default if you must.

Five Comments and Notes

Posted on 2 January 20103 January 2010 by David Merkel

1) There is a new blog that I recommend: Macroeconomic Resilience.? I have commented there recently, and I think that he understands the complexity of markets in ways that most Ph. D. economists don’t.? Here is a recent post, and my comment.

http://www.macroresilience.com/2010/01/01/moral-hazard-a-wide-definition/comment-page-1/#comment-6

One job ago, at a hedge fund that was bearish on financials, we would talk about this all the time.? Regulators could have stopped the crisis in the early 2000s had they simply enforced lending standards.? The banks would have screamed and ROEs would have gone into the single digits, but the crisis could have been prevented.

But, regulators are to a degree subject to politicians.? Politicians, in the absence of any moral compass aside from re-election, are mainly beholden to those that fund their campaigns, when the electorate is without education, or a moral compass as well.? Thus, regulations were neutered.

After that, how many businessmen would watch out for the companies they served, instead of what would maximize their pay?? There were some bankers that did so and got shown the door.? There were other banks owned privately, were conservative, and missed the crisis.? It could be done, but the management team or owners had to deliberately sacrifice the short run in favor of missing an uncertain crisis.

Chuck Prince said something to the effect of “When the music is playing, you gotta get up and dance.” to justify doing business in the face of bad credit metrics.? Well, yes, in a place where no one cares for the long-run health of the firms, or of society as a whole.

Someone has to care for the long run.? Better it be free individuals rather than the government.? But if free individuals will not do it, eventually the government will.

2) I have been a fan of Michael Pettis for many years, from his publication of his book, The Volatility Machine.? Here is a comment that I posted at his blog, which I highly recommend:

http://mpettis.com/2010/01/china-new-year-and-one-more-vote-for-gdp-adjusted-bonds/

Michael, I ordinarily agree with you on almost everything economic, but I can?t agree on the trills. I believe in asset-liability matching, even at the government level. Try to match term risk and liquidity risk to what is being funded.

I have argued that the debt structure of the US government has been getting too short, and recommended that the US Treasury lengthen its funding policies ? I even said that to the Treasury officials that I met with in November.

http://alephblog.com/2008/11/25/issuing-debt-for-as-long-as-our-republic-will-last/
http://alephblog.com/2009/11/04/my-visit-to-the-us-treasury-part-2/ (2 of 7)

But trills have exceedingly long duration ? the remind me of some structured settlements that I have had to model, but these are perpetuities ? even longer for the coupon to grow. Duration looks like it would be north of 40 ? it depends on the assumptions used.

A perpetuity growing at GDP rates saddles our posterity with debts that they cannot bear. Cheap debt up front ? really costly on the back end.

http://alephblog.com/2009/12/27/not-so-cheap-trills/

But, thanks ever so much for your blogging. I learn so much from you. Keep it up.

3)? Insurance for those dropping out of school?? Sounds really dumb:

http://blogs.wsj.com/economics/2009/12/31/would-insurance-for-college-failure-keep-more-students-enrolled/

This sounds like a product that only dumb insurers would write. Never write insurance where the insured has better knowledge and more control than the insurance company.

4) Many are crying over auction rate preferred securities.? But most of the assets that were harmed were owned by corporations, who had investment professionals that chose auction rate preferred securities because they yielded significantly more than money market funds, but with seemingly little risk, and the system worked for around 20 years.

They took above average risks, and now they expect to be bailed out?? I have read through many ARPS prospectuses.? For those that read them, the risks were clearly disclosed.? I do not have a lot of sympathy for those that did not do their job.

5) From the “bitter taste” zone, we learn that foreign investors in US debt lost the most versus investing in the debt of other developed nations in 2009.? Should that surprise us when demands for loans accelerated dramatically in 2009?? I don’t think so, and most reasonable analysts would agree.

Yield = Poison (2)

Posted on 2 January 2010 by David Merkel

My first real post at the blog was Yield = Poison.? In late February 2007, prior to the blowup in the Shanghai market, I felt frustrated and wanted to simply say that every fixed income class seemed overvalued.? Short and safe seemed best.

It reminded me of a discussion that I had with a colleague two jobs ago, where in mid-2002, the theme was “yield is poison.”? I did the largest credit upgrade trade that I could in the second quarter of 2002, prior to the blowup of Worldcom.? Moved the whole portfolio up three notches in four months.? Give away yield; preserve capital for another day.

I feel much the same, but not as intensely in the present environment.? Spreads could come in further if the government keeps providing low cost liquidity to those who make money on the spread they earn on financial assets.? But most fixed income assets do not reflect likely default costs.? Perhaps the long end of the Treasury curve is worth a little allocation of assets here, if only as a deflation hedge, but if the Fed is going to start lightening up on their QE, and the Treasury will be having high issuance, I might want to stand back for a while? while supply will be high, and try to buy near the end of the quarterly refunding.

There is another sense in which I say “yield = poison,” though.? When rates for safe assets are low, retail and professional investors are both tempted to stretch for yield.?? Wall Street is more than happy to deliver on your desire for yield.? It is their top illusion, in my opinion.

Two examples from my bond trading days: the first was some local brokers asking to buy a small amount relatively highly-rated junk bonds from us.? They were offering a full dollar over the usual market price.? They called me, since I ran the office, but I handed them over to the high yield manager, who said, “Jamming retail, are we?”? [DM: placing overpriced bonds in customer accounts.]? After a lame reply which amounted to,”Look, don’t ask us about what we are doing, we’re offering you a good deal, do you want to sell your bonds or not?”? the high yield manager sold them a small amount of the bonds, and we didn’t hear from them again.

The second example was when a bulge bracket firm called me and asked me if I owned a certain very long duration bond.? I said yes, and he made me an offer several dollars above what I thought they were worth.? With a bid that desperate, I said I could offer a few there, and more a little back, but for the block he would have to pay more still.? He offered something close to the “more still” price, and I sold the block to him there.

As we were settling the trade, I asked him, “Why the great bid?”? He said, “We need the bonds for retail trusts.? They get an above average yield, but if rates fall, after five years, we buy them out at par, and keep the bonds.? If rates rise, they take the loss.”

Even on Wall Street, if you have a good relationship, you get an honest answer.? That said, it made me sorry that I sold the bonds, even though it was the best thing for my client.

There are many ways to frame the yield question at present, here are two:

You are on a fixed income, and you are having a hard time making ends meet.? Should you lend longer to earn more, go for lower rated credits, or do nothing?
You are earning almost nothing on your money market fund.? You need liquidity, but where else could you invest it?

I would be inclined to buy a mix of foreign-denominated bonds, but most people can’t deal with that.? So, I would advise them to build a “bond ladder” where they have high quality issues maturing every year for the next 10 years.? As each bond matures, I would use the proceeds to buy bonds ten years out, re-establishing the 10-year ladder.

But don’t reach for yield.? Odds are, you will get capital losses great than the excess yield you hoped to receive.? And remember this, don’t buy products someone else wants to sell you.? Specifically, don’t buy high yielding investment products that Wall Street sells to enhance your income.? They prey upon those who want more money, and are weak in their knowledge of how the markets work.

To professionals: don’t reach for yield now; long-run, you are not getting paid for the risks.? You have seen how illiquid structured products can be in the face of credit uncertainty, and impaired balance sheets of holders and likely purchasers.? You have seen how spreads can blow out (bond prices fall), and roar back in (prices rise again) in the absence of safe places to invest money.

I’ll give the Treasury and the Fed this: they have created an environment where savers are punished, and have to take significant risks to get yield.? They have created a situation where the markets are dependent on subsidized credit, and speculation dominates over lending to the real economy.? They are pushing us deeper into a liquidity trap, as low-to-negative return investments in autos, homes, and banks get supported by cheap public credit, rather than getting reconciled in bankruptcy, so that capital can be redeployed to higher returning projects.

Anyway, enough for now — more later.

Catching up on Blog Comments

Posted on 18 December 2009 by David Merkel

Before I start, I would like to toss out the idea of an Aleph Blog Lunch to be hosted sometime in January 2010 @ 1PM, somewhere between DC and Baltimore.? Everyone pays for their own lunch, but I would bring along the review copies of many of the books that I have reviewed for attendees to take home, first come, first served.? Maybe Eddy at Crossing Wall Street would like to join in, or Accrued Interest. If you are an active economic/financial blogger in the DC/Baltimore Area, who knows, maybe we could have a panel discussion, or something else.?? Just tossing out the idea, but if you think you would like to come, send me an e-mail.

Onto the comments.? I try to keep up with comments and e-mails, but I am forever falling behind.? Here is a sampling of comments that I wanted to give responses on.? Sorry if I did not pick yours.

=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=–==-=–==-

Blog comments are in italics, my comments are in regular type.

http://alephblog.com/2009/12/16/notes-on-fed-policy-and-financial-regulation/#comments

Spot on David. I often think about the path of the exits strategy the fed may take. In order, how may it look? What comes first what comes last? Clearly this world is addicted to guarantees on everything, zirp, and fed QE policy which is building a very dangerous US dollar carry trade.

Back to the original point, I would think the order of exit may look something like:

1. First they will slowly remove emergency credit facilities, starting with those of least interest, which were aggressively used to curb the debt deflationary crisis on our banking system. The added liquidity kept our system afloat and avoided systemic collapse that would have brought a much more painful shock to the global financial system. Lehman Brothers was a mini-atom bomb test that showed the fed and gov?t would could happen ? seeing that result all but solidified the ?too big to fail? mantra.

2. Second, they will be forced to raise rates ? that?s right folks, 0% ? 0.25% fed funds rates is getting closer and closer to being a hindsight policy. However, I still think rates stay low until early 2010 or unemployment proves to be stabilizing. As rates rise, watch gold for a move up on perceived future inflationary pressures.

3. Third, they can sell securities to primary dealers via POMO at the NY Fed, thereby draining liquidity from excess reserves. I think this will be a solid part of their exit strategy down the road ? perhaps later in 2010 or early 2011. As of now, some $760Bln is being hoarded in excess reserves by depository institutions. That number will likely come way down once this process starts. The question is, will banks rush to lend money that was hoarded rather then be drained of freshly minted dollars from the debt monetization experiment. For now, this money is being hoarded to absorb future loan losses, cushion capital ratios and take advantage of the fed?s paid interest on excess reserves ? the banks choose to hoard rather then aggressively lend to a deteriorating quality of consumer/business amid a rising unemployment environment. This is a good move by the banks as the political cries for more lending grow louder. The last thing we need is for banks to willy-nilly lend to struggling borrowers that will only prolong the pain by later on.

4. And finally, as a final and more aggressive measure, we could see capital or reserve requirements tightened on banks to hold back aggressive lending that may cause inflationary pressures and money velocity to surge. Right now, banks must retain 10% of deposits as reserves and maintain capital ratios set by regulators. Either can be tweaked to curb lending and prevent $700bln+ from entering the economy and being multiplied by our fractional reserve system.

I think we are starting to see #1 now, in some form, and will start to see the rest around the middle of 2010 and into 2011. The last item might not come until end of 2011 or even 2012 when economy is proven to be on right track and unemployment is clearly declining as companies rehire.

Thoughts????

UD, I think you have the Fed’s Order of Battle right.? The questions will come from:

1) how much of the quantitative easing can be withdrawn without negatively affecting banks, or mortgage yields.

2) How much they can raise Fed Funds without something blowing up.? Bank profits have become very reliant on low short term funding.? I wonder who else relies on short-term finance to hold speculative positions today?

3) Finance reform to me would include bank capital reform, including changes to reflect securitization and derivatives, both of which should require capital at least as great as doing the equivalent transaction through non-derivative instruments.

http://alephblog.com/2009/12/15/book-reviews-of-two-very-different-books/#comments

David,
A few years back you mentioned to me in an e-mail that Fabozzi was a good source for understanding bonds (thank you for that advice by the way, he is a very accessible author for what can be very complex material.)? In the review of Domash’s book you mention that he does not do a good job with financials. I was wondering, is there an author who is as accessible and clear as Fabozzi, when it comes to financials, who you would recommend.

Regards,
TDL

TDL, no, I have not run across a good book for analyzing financial stocks.? Most of the specialist shops like KBW, Sandler O?Neill and Hovde have their own proprietary ways of analyzing financials.? I have summarized the main ideas in this article here.

http://alephblog.com/2007/04/28/why-financial-stocks-are-harder-to-analyze/

http://alephblog.com/2009/12/05/the-return-of-my-money-not-the-return-on-my-money/#comments

Sorry to be a bit late to this post, but I really like this thread (bond investing with particular regard to sovereign risk). One thing I’m trying to figure out is the set of tools an individual investor needs to invest in bonds globally. In comparison to the US equities market, for which there are countless platforms, data feeds, blogs, etc., I am having trouble finding good sources of analysis, pricing, and access to product for international bonds, so here is my vote for a primer on selecting, pricing, and purchasing international bonds.

K1, there aren?t many choices to the average investor, which I why I have a post in the works on foreign and global bond funds.? There aren?t a lot of good choices that are cheap.? It is expensive to diversify out of the US dollar and maintain significant liquidity.

A couple of suggested topics that I think you could do a job with:? 1) Quantitative view of how to evaluate closed end funds trading at a discount to NAV with a given NAV and discount history, fee/cost structure, and dividend history;?? 2) How to evaluate the fundamentals of the return of capital distributions from MLPs – e.g. what fraction of them is true dividend and what fraction is true return of capital and how should one arrive at a reasonable profile of the future to put a DCF value on it?

Josh, I think I can do #1, but I don?t understand enough about #2.? I?m adding #1 to my list.

http://alephblog.com/2009/12/05/book-review-the-ten-roads-to-riches/#comments

I see that Fisher’s list reveals his blind spot–how about being born the child of wealthy parents. . .

BWDIK, Fisher is talking about ?roads? to riches.? None of us can get on that ?road? unless a wealthy person decided to adopt one of us.? And, that is his road #3, attach yourself to a wealthy person and do his bidding.

I am not a Ken Fisher fan, but I am a David merkel fan—so what was the advice he gave you in 2000?

Jay, what he told me was to throw away all of my models, including the CFA Syllabus, and strike out on my own, analyzing companies in ways that other people do not.? Find my competitive advantage and pursue it.

That led me to analyzing industries first, buying quality companies in industries in a cyclical slump, and the rest of my eight rules.

http://alephblog.com/2009/11/28/the-right-reform-for-the-fed/#comments

“The Fed has been anything but independent.? An independent Fed would have said that they have to preserve the value of the dollar, and refused to do any bailouts.”

This seems completely wrong to me.? First, the Fed’s mandate is not to preserve the value of the dollar, but to “”to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”? I don’t see that bailouts are antithetical to those goals. Second, I don’t see how the Fed’s actions in 2008-2009 have particularly hurt the value of the dollar, at least not in terms of purchasing power.? Perhaps they will in the future, but it is a bit early to assert that, I think.

Matt, even in their mandates for full employment and stable prices, the Fed should have no mandate to do bailouts, and sacrifice the credit of the nation for special interests.? No one should have special privileges, whether the seeming effect of purchasing power has diminished or not.? It is monetary and credit inflation, even if it does not result in price inflation.

?Make the Fed tighten policy when Debt/GDP goes above 200%.? We?re over 350% on that ratio now.? We need to save to bring down debt.?

David, I fully agree (as with your other points).
However, I do not see it happening.

Why would we save when others electronically ?print? money to buy our debt?

See todays Bloomberg News:
?Indirect bidders, a group of investors that includes foreign central banks, purchased 45 percent of the $1.917 trillion in U.S. notes and bonds sold this year through Nov. 25, compared with 29 percent a year ago, according to Fed auction data compiled by Bloomberg News.?

Please note that last year the amount auctioned was much lower (so foreign central banks bought a much lower percentage of a much lower total).

Please also note that all of a sudden, earlier this year, the definition of ?indirect bidders? was changed, making it more complicated to follow this stuff. What is clear however, is that almost half of the incredible amount of $ 2 trillion, i.e. $ 1000 billion (!!), is being ?purchased? by the printing presses of foreign central banks.

This could explain both the record amount of debt issued and the record low yields.

As the CBO has projected huge deficits PLUS huge debt roll-overs (average maturity down from 7 years to 4 years) up to at least 2019, do you think we could extend the ?printing? by foreign central banks? — CB?s ?buying? each others debt — for at least 10 more years?
That would free us from saving, enabling us to ?consume? our way to reflation of the economy (as is FEDs/Treasuries attempt imo).

I?d appreciate your, and other readers?, take on this.

Carol, you are right.? I don?t see a limitation on Debt to GDP happening.

As to nations rolling over each other?s debts for 10 more years, I find that unlikely.? There will be a reason at some point to game the system on the part of those that are worst off on a cash flow basis to default.

The rollover problem for the US Treasury will get pretty severe by the mid-2010s.

http://alephblog.com/2009/11/13/the-forever-fund/#comments

Any chance of you doing portfolio updates going forward? I?d be curious to see if you still like investment grade fixed incomes, given the rally.

Matt, I would be underweighting investment grade and high yield credit at present.

As for railroads, I own Canadian National ? unlike US railroads, it goes coast to coast, and slowly they are picking up more business in the US as well.

Long CNI

http://alephblog.com/2009/11/10/my-visit-to-the-us-treasury-part-7-final/#comments

Did none of the bloggers raise the question of the GSEs? I can understand Treasury not wishing to tip their hands as to their future, but I would have expected their status to be a hot topic among the bloggers.

I also don?t buy the idea that the sufferings of the middle class were inevitable. Over the past 15 or so years the financial sector has grown due to the vast amount of money that it has been able to extract. Where would we be if all of those bright hard working people and capital spending had gone to the real economy? I?m not suggesting a command economy, but senior policymakers decided to let leverage and risk run to dangerous levels. Your comment seem to indicate that this was simply the landscape of the world, but it seems more to be the product of a deliberate policy from the Federal government.

Chris, no, nothing on the GSEs.? There was a lot to talk about, and little time.

I believe there have been policy errors made by our government ? one the biggest being favoring debt finance over equity finance, but most bad policies of our government stem from a short-sighted culture that elects those that govern us.? That same short-sightedness has helped make us less competitive as a nation versus the rest of the world.? We rob the future to fund the present.

http://alephblog.com/2009/11/07/my-visit-to-the-us-treasury-part-6/#comments

it?s not clear from your writing whether the treasury officials talked to you about the GSEs or whether your comments (in the paragraph beginning with ?When I look at the bailouts,?) are your own. could you clarify?

q, That is my view of how the Treasury seems to be using the GSEs, based on what they are doing, not what they have said.

http://alephblog.com/2009/10/31/book-review-nerds-on-wall-street/

?There are a lot of losses to be taken by those who think they have discovered a statistical regularity in the financial markets.?
David, take a look at equilcurrency.com.

Jesse, I looked at it, it seems rather fanciful.

http://alephblog.com/2009/10/27/book-review-the-predictioneers-game/#comments

David,
Just wondering if there?s an omission in this line:

?The last will pay for the book on its own. I have used the technique twice before, and it works. That said, that I have used it twice before means it is not unique to the author.?

Did you mean to write ?that I have used it doesn?t mean it is not unique?.?

In the event it is, I?ll look it up in the book, which I intend to buy anyway.
Otherwise, may I request a post that details, a la your used car post,your approach to buying new cars?

Saloner, no omission.? I said what I meant.? I?ll try to put together a post on new car purchases.

http://alephblog.com/2009/10/22/book-review-the-bogleheads-guide-to-retirement-planning/

thanks for the book review. it sounds like something that i could use to get the conversation started with my wife as she is generally smart but has little tolerance for this sort of thing.

> unhedged foreign bonds are a core part of asset allocation

i agree in principle ? it would be really helpful though to have a roadmap for this. how can i know what is what?

I second that request for help in accessing unhedged foreign bonds ? Maybe a post topic?

JK, q, I?ll try to get a post out on this.

http://alephblog.com/2009/10/20/toward-a-new-theory-of-the-cost-of-equity-capital-part-2/#comments

to the point above, basically just an IRR right?

JRH, I don?t think it is the IRR.? The IRR is a measure of the return off of the assets, not a rate for the discount of the asset cash flows.

When I was an undergraduate (after already having been in business for a long time), I realized that M-M was erroneous, because of all the things they CP?d (ceteris paribus) away. For my own consumption, I went a long way to demonstrating that quantitatively, but children, work and family intervened, and who was I to argue with Nobel winners.

But time, experience and events convince me that I was right then and you are right now. As you?ve noted the market does not price risk well. In large part this is due to a fundamental misunderstanding of value. The professional appraisal community has a far better handle on this, exemplified by drawing the formal distinction between ?fair market value as a going concern?, ?investment value?, ?fair market value in a orderly liquidation?, ?fair market value in a forced liquidation? and so on. One corollary to the foregoing is one of those lessons that stick from sit-down education, that ?Book Value? is not a standard of value but rather a mathematical identity.

Without going into a long involved academic tome, the cost of capital (and from which results the mathematical determination of value per the income approach) has a shape more approaching that of a an asymmetric parabola (if one graphs return on the y axis and equity debt weight on the x.).

If I was coming up with a new theorem, risk would be an independent variable. So for example:

WAAC = wgt avg cost of equity + wgt avg cost of debt + risk premium

You?ll note the difference that in standard WAAC formulation risk is a component of the both the equity and debt variable ? and practically impossible to consistently and logically quantify. Yes, one can look to Ibbottson for historical risk premia, or leave one to the individual decision making of lenders, butt it complicates and obscures the analysis.

In the formulation above, cost of equity and cost of debt are very straightforward and can be drawn from readily available market metrics. But what does risk look like? Again if you plot risk as a % cost of capital on the y axis and on the x axis the increasing debt weight, on a absolute basis risk is lowest @ 100% equity. From there is upwards slopes. However, risk however is not linear, but rather follows a power law.

The reason risk follows a power law is that while equity is prepared to lose 100%, debt is not. Also, debt weight increases IRR to equity (in the real world) contrary to MM. Again, debt is never priced well, because issuers don?t understand orderly and forced liquidation, whereby in ?orderly?, e.g. say Chapter 11,recoveries may be 80 cents on the dollar, and forced, e.g., Chapter 7, 10 cents on the dollar. One really doesn?t begin to understand the foregoing until you?ve been through it more than a few times.

So in the real world, as debt increases, equity is far more easily ?playing with house money.? A recent poster child for this phenomena is the Simmons Mattress story. In the most recent go round equity was pulling cash out (playing with house money) and the bankers were either (depending on one?s POV) incredibly stupid for letting equity do so, or incredibly smart, because they got their fees and left someone else holding the bag. I?m seen some commentators say that ?Oh it was OK because rates were so low, the debt service (the I component only) was manageable.? Poppycock; sometime it?s the dollar value and sometimes it?s the percentage weight and sometimes it is both.

But you?ve already said that: ?company specific risk is significant and varies a great deal.? I would also add that ? or amplify ? that in any appraisal assignment the first thing that must be set is the appraisal date. Everything drives off that and what is ?known or knowable? at the time.

Gaffer, thanks for your comments.? I appreciate the time and efforts you put into them.? This is an area where finance theory needs to change.

http://alephblog.com/2009/10/10/pension-apprehension/

I have a DB plan with Safeway Stores-UFCW, which I?ve been collecting for a few years. I?m cooked?

Craig, not necessarily.? Ask for the form 5500, and see how underfunded the firm is.? Safeway is a solid firm, in my opinion.

Long SWY

http://alephblog.com/2009/09/29/recent-portfolio-actions/#comments

David, I am curious about your rebalancing threshold. Do you calculate this 20% threshold using a formula like this:

= Target Size / Current Size ? 1

I have a small portfolio of twenty securities. A full position size in the portfolio is 8% (position size would be 1 for an 8% holding). The position size targets are based generally on .25 increments (so a position target of .25 is 2% of the portfolio and there are 12.5 slots ?available?). I used that formula above for a while, but I found that it was biased towards smaller positions.

Instead I began using this formula:

= (Target ? Current Size) / .25

So a .50 sized holding and a full sized holding may have both been 2% below the target (using the first formula), but using the second formula, they would be 8% and 16% below the target respectively. I found this showed me the true deviation from the portfolio target size and put my holdings on an equal footing for rebalancing.

I was curious how you calculated your threshold, or if it was less of an issue because you tended to have full sized positions. For me, I tend to start small and build positions over time. There are certain positions I hold that I know will stay in the .25-.50 range because they either carry more risk, they are funds/ETFs, or they are paired with a similar holding that together give me the weight I want in a particular sector.

Brian, you have my calculations right.? I originally backed into the figure because concentrated funds run with between 16-40 names.? Since I concentrate in industries, I have to run with more names for diversification.? I don?t scale, typically, though occasionally I have double weights, and rarely, triple weights.? The 20% band was borrowed from three asset managers that I admire.? After some thought, I did some work calculating the threshold in my Kelly criterion piece.

A fuller explanation of the rebalancing process is here in my smarter seller pieces.

http://alephblog.com/2009/09/04/tickers-for-the-latest-portfolio-reshaping/

Have you seen DEG instead of SWY?
Extremely able operator. Some currency diversification as well. I?d like to know your thougts.

MLS, I don?t have a strong idea about DEG ? I know that back earlier in the decade, they had their share of execution issues.? It does look cheaper than SWY, though.

Long SWY

http://alephblog.com/2009/06/11/problems-with-constant-compound-interest-2/

I like your post and want to comment on a couple of items.? You point to the peak of the 1980’s inflation rates and the associated interest rates.

Robert Samuelson wrote a book called The Great Inflation and it’s Aftermath.?? http://tiny.cc/z9H9V

Basically you can explain a great deal the US stock market history of the 40 years by the spike in interest/inflation until the mid 80’s and the subsequent decline.? Since you need an interest rate to value any cash flow, the decline in interest rates made all cash flows more valuable.

The thing that is odd and sort of ties this together is the last year.? After interest rates crossed the 4% level things started blowing up.? The amount of debt that can be financed at 3% to 4% is enormous.? That is, as everyone knows, on of the root causes of the housing bubble.? Anyway, starting last year, treasury interest rates continued to decline and all other rates went through the roof.

I was looking at this chart yesterday.? _ http://tiny.cc/eCZzF The interesting thing to me was that when the system blew up, treasury rates continued to decline and all non guaranteed debt rates went through the roof.

Most of this is obvious and everyone knows the reasons.? The one thing that seems novel is thinking of this as the continuation of a very long secular trend — or secular cycle.? I don’t want to get overly political, but the decrease in inflation/interest in the 90’s to the present was a function of productivity/technology and Foreign/Chinese imports.? Anyway, one effect of these policies was a huge rise in asset values, especially in the FIRE (finance, insurance, real estate) sector of the economy at the expense of our industrial and manufacturing sectors.? This was also a redistribution of wealth from the rust belt to the coasts.

It is much more complicated then the hand full of influences I mentioned, but the one thing i haven’t seen discussed a lot is the connection of the current catastrophe to the long term decline in inflation/interest rates since the mid/late 1980’s.? If you think about it, declining interest rates increase the value of financial assets and are an enormous tailwind for finance.? I suppose if you had just looked at the curve, it would have been obvious that the trend couldn’t continue.? Prior to the blowup, there were lots of people financing long term assets with short term, low interest rate liabilities. That was a big part of the basic playbook for structured finance, hedge funds, etc.

The reason that the yield spread exploded is well known.? Here is a snippet from Irving Fisher.? http://capitalvandalism.blogspot.com/2009/01/deflationary-spirals.html

CapVandal ? Great comment.? A lot to learn from here.? I hope you come back to blogging; you have some good things to say.? Fear and greed drive correlated human behavior.

Book Reviews of Two Very Different Books

Posted on 15 December 200915 December 2009 by David Merkel

Tonight’s book reviews are of two very different, yet very similar books: Fire Your Stock Analyst!: Analyzing Stocks On Your Own (2nd Edition) and, Far from Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement.

Why different?? Well, the first relies on fundamental analysis, and the second on technical analysis.? Why similar?? They are both very single-minded in the way they present how to win in investing.

There are other differences, though.? Fire Your Stock Analyst, by Harry Domash, is a very complete fundamental investing guide for both value and growth investors.? Very complete, to the degree that most average investors will not be able to do all that Harry recommends.? There is a lot to do, and not all of it is of highest importance in my opinion.? Many professional investment shops ignore steps that he prescribes.? I don’t do half of what he prescribes, and I do better than most.? Also, much of what he prescribes is not applicable to financial stocks, but he does not seem to realize that.

Far from Random has a different flaw.? It spends 75% of the book talking about what does not work, and only 25% on what he thinks works.? In the last quarter of the book, the author asserts that trend channel analysis works? through giving stylized examples.? There are no academic studies to prove the point, or, audited track records, as Michael Covel is fond of.? (This makes me want to recommend Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets; there is more logic behind it than Far from Random.)

Who could benefit from these books:

With Fire your Stock Analyst, someone who wants an introduction to fundamental analysis could benefit.? Far from Random, I’m not sure anyone could benefit.? There are much better books on technical analysis.

Full disclosure:? Publishers send me books for free.? I review some of them, the ones that I think are most interesting.? If you enter Amazon through my site and buy anything, I get a small commission.? Don’t buy anything you don’t want.? I do this as a service to readers, and am not looking for remuneration as much as tips for what I have written more generally.

The Return of My Money, Not the Return on My Money

Posted on 5 December 20096 December 2009 by David Merkel

Before I begin, I want to thank longtime readers, and ask them to give me some feedback.? I have a category entitled Best Articles; what would you nominate to be in there.? Also, what would you take out?? I’ve tagged a few articles from the early days, but since then, have not done much with it.? If you have ideas, please let me know.? Thanks again.

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As bond investors go, I tend to focus on what can go wrong more than most, so when I looked at the cover of Barron’s today, I said, “Oh, no.? Pushing yield now?”

It’s no secret that most safe investment grade debt does not yield much now.? Many investors, hungry for yield, must look for other ways to earn income, even if it means greater hazard of capital loss.? That is another impact of the federal reserve flooding the debt markets with liquidity — the safe investments yield little, forcing those that want yield to take significant risks, whether those risks are lending long, high credit risk, operational risk (common stock and MLP dividends), or subordinated credit risk (preferred stocks).

The history of chasing yield is not promising.? In general, average retail investors reach for yield at the wrong time, and Wall Street is more than happy to facilitate that through structured notes and other high yielding investments where the risk is greater than the excess yield.

But wait — I can endorse some of the article.? I like utilities here.? I don’t own Verizon or AT&T, but I could imagine owning them.? MLPs in energy distribution?? Probably safe; consider their competitive positions and consider where things might go wrong.? I’m not jumping to buy them, though.

Where I can’t sign on is with preferred stocks and convertibles.? All of the preferred stocks that the article cites are financials with marginal investment grade ratings.? The convertibles are from a grab bag of low junk-rated securities.

How quickly we forget the ugliness of 2008.? If we have a second dip in the financial economy for whatever reason, the preferred and convertible securities will do the worst.? In order to get significant yields one must take credit risks in excess of average loss costs — it is safe to say at times like this, the purchase of risky securities is not rewarded.? Be wary with all purchases of risky debt at present.

Book Review: The Ten Roads to Riches

Posted on 5 December 20096 December 2009 by David Merkel

Many dream of riches.? Few achieve them.? Why?? It usually involves self-denial and hard work.? It’s not that anyone can’t achieve riches, if they start young enough, but they won’t make the sacrifices to do so.? A strong education helps, but is not absolutely required.? As my old boss Eric Hovde said to his staff repeatedly, the biggest difference in success comes from the degree of effort put forth.? I would only add that working smart amplifies the effort of working hard.

Ken Fisher the billionaire asset manager, identifies the ten ways he has seen to become wealthy.? They are:

1) Build a significant business.

2) Manage a significant business.

3) Be the right hand man of a wealthy person.

4) Be a star athlete, entertainer, or one who significantly facilitates star athletes and entertainers.

5) Marry a wealthy person.

6) Be a lawyer that helps clients sue for major amounts of money on a contingency fee basis.

7) Manage a lot of Other People’s Money.

8 ) Be an inventor of something popular, a popular writer, a prominent politician, or invent an organization that a lot of people want to give money to.

9) Borrow a lot of money and speculate on property appreciation.

10) Work hard, save a lot, and invest wisely.

I think he has nailed it.? My way of summarizing it is that you have to do something that makes a lot of people happy, or at least has the potential to make a lot of people happy.? Or, make one wealthy person very happy or unhappy. Three groups — how do they work out?

A) Those who do something that makes a lot of people happy can earn a lot:

Successful business founders, CEOs, right hand men, inventors
Stars and their significant enablers
Good asset managers
Good writers
Successful real estate developers

B) But even those that promise to do something to make people happy and fail at it can earn a lot:

Any CEO of a big enterprise can earn a lot — at one investment firm, we used to joke that you got paid $50 million to destroy a company — it is what they had to pay to get rid of you.? Their right hand men will still prosper too, just not as much.? In the current financial crisis, that is what gores many about the large surviving firms that were bailed out.? The executives are still prospering after previous dumb decisions.? Easy to complain about it, but it is nice work if you can get it.? (Note: this is why they should not have been bailed out, especially not at the holding company level.? Government officials lie when they say they could not have done it differently.? I for one suggested alternatives ahead of time.)
The same applies to CEOs that tweak the company’s earnings while they are there, but leave their successor in the hole.
Many still follow stars as their stars fade; they may not make as much, but it is still a lot.? Same for writers that lose their knack.
Many asset managers have an early period where they don’t have much in the way of assets, and their track record is great; their ideas for excess return are executable with the current assets under management [AUM].? That leads to growth in assets, until they are too big for the asset class in which they have expertise.? They become index-like, or they venture outside their circle of competence, and their track record suffers.? But AUM is high, and the fees can provide a nice income.? Assets are sticky if you don’t do too badly, and are a good salesman/storyteller.
Politicians can make a lot of money off of contacts or giving speeches once out of office, even if they were on net harmful to the nation while in office.
Some charities (or nonprofits like mutual insurers or credit unions) can be less than scrupulous about what managers get paid.
The real estate speculator, the CEO, and certain investment managers can have a “Heads-I-win, Tails-you-lose” attitude.? America gives people a lot of second chances before you are permanently branded as a fraud.? It only takes one big win to make a lot for yourself, even if you destroy the well-being of others in the process.

C) Then there are those that only have to serve a few:

The spouse of a wealthy person.
The right hand man of a wealthy person, and
The Trial Lawyer going after a big tort
Serve yourself, as an ordinary person working at a job.

No one begrudges the wealth of those in group A — they have served society well.? Many begrudge the wealth of those in group B — they have not served society well.? Group C?? It depends on motives.? More later on this.

One thing is certain, though.? There aren’t many seats in each of the “roads to riches,” except for the last ordinary one, #10.? Few are founders of massive enterprises, or CEOs, or stars, or investors of must-have products or processes.? Few can serve in high office, or write best-sellers, or be able to source a lot of assets to manage.? Few can get the capital markets or banks to loan them millions, even billions.? Few get to try a lawsuit where a huge award is won.? Few get to marry rich.? Also, most succeeding have to hit their right path while young, to allow enough time for compounding their success.

It takes a lot of effort and good breaks in order to be at the top of any economic situation where there is a lot of wealth.? Even road #10, doing well at your job, saving a lot and investing wisely is tough.? Few get to become “The Millionaire Next Door,” but more achieve reasonable wealth that way than all of the rest combined.

Ken Fisher writes about all of these areas in an entertaining way, and gives practical advice on how to follow each road, including additional books to read, and techniques for getting started.? It is an ambitious and compact book weighing in at around 230 pages of text including the preface.? It is an easy, breezy read. As a bonus, in road 10, Ken Fisher shares basic investment advice for the retail investor.

More than Quibbles:

I owe a lot to Ken Fisher for advice that he gave me in Winter 2000, and though I enjoyed the book, I can’t endorse it wholeheartedly.? He is out to tell you how to do it, even in cases where there might be significant moral compromise.? He acknowledges that, but says it is a part of the game.

To me, the key question is what your motives are.? It’s one thing to enter into a risky business, offer full disclosure to all stakeholders in advance, make a best effort, and fail.? It is quite another to trick/cajole people into backing you without full knowledge, and fail.

It is one thing to try a legal case where the damages are proportionate to the harm caused, and another thing to help create disproportionate judgments. It is one thing to serve a wealthy person who asks you to do things that are ethical, and another thing to serve in things that are unethical.? Once you have fans, a privileged job, or “sticky assets,” do you start giving less than your best?? I write this as one that is himself prone to laziness when things go well.? It is a common sin that one has to fight.

Are you looking out for the best interests of those you serve, and society more broadly?? A tough question for any of us, but society itself does not do well when a dominant proportion of it does not serve for good motives.? If it gets bad enough, the society will lose legitimacy and vitality.

Finally, it is one thing to marry because you love the person, and want to give your all to your future spouse.? It is quite another thing to enter in with crossed fingers, and say, “Maybe this will work, maybe it won’t.? I will be careful to protect myself, because the odds of failure are significant.? But economically, it will work out for me either way.? I’m wealthy if we marry, whether it works or not, because the prenup will leave me well off.”

Here’s the common vow: I, (Bride/Groom), take you (Groom/Bride), to be my (wife/husband), to have and to hold from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part. Maybe promises don’t mean much any more, but I can’t see how one marrying for money can say that with a clear conscience.

Before my wife and I married, but after we were engaged, we were at a bookstore together, and we were looking over some marriage books to find one our pastor recommended.? She found a book entitled, “Marry Rich.”? She said to me, “This is a joke book, right?”? I said, “Uh, you would be surprised at the motives some have in marriage.”? She began leafing through it, amazed at the level of greed involved.? She married her poor graduate student boyfriend anyway.? 23 years later things are still working out well for her (and me).

One final note, not from the book: greed wears people out.? It is one thing to do what you love so long as money is not the sole purpose.? But those that are greedy for gain at all costs destroy themselves, and those around them.? It is not a good trade.

With those caveats, if you want to buy the book, you can buy it here: The Ten Roads to Riches: The Ways the Wealthy Got There (And How You Can Too!) (Fisher Investments Press).

Full Disclosure: I review books because I love reading books, and want to introduce others to the good books that I read, and steer them away from bad or marginal books.? Those that want to support me can enter Amazon through my site and buy stuff there.? Don?t buy what you don?t need for my sake.? I am doing fine.? But if you have a need, and Amazon meets that need, your costs are not increased if you enter Amazon through my site, and I get a commission.? Win-win.

Book Review: Market Indicators

Posted on 28 November 2009 by David Merkel

Every one one us has limited bandwidth for analysis of data.? We pick and choose a few ideas that seem to work for us, and then stick with them.? That is often best, because good investors settle into investment methods that are consistent with their character.? But every now and then it is good to open things up and try to see whether the investment methods can be improved.

For those that use market indicators, this is the sort of book that will make one say, “What if?? What if I combine this market indicator with what I am doing now in my investing?”? In most cases, the answer will be “Um, that doesn’t seem to fit.”? But one good idea can pay for a book and then some.? All investment strategies have weaknesses, but often the weaknesses of one method can be complemented by another.? My favorite example is that as a value investor, I am almost always early.? I buy and sell too soon, and leave profits on the table.? Adding a momentum overlay can aid the value investor by delaying purchases of seemingly cheap stocks when the price is falling rapidly, and delaying sales of seemingly cheap stocks when the price is rising rapidly.

Looking outside your current circle of competence may yield some useful ideas, then.? But how do you know where you might look if you’re not aware that there might be indicators that you have never heard of?? Market Indicators delivers a bevy of indicators in the following areas:

Options-derived (VIX, put/call)
Volume and Price driven (Money flow, rate of change, 90% up/down days, and more)
Where the fast money invests (money in bull vs bear funds, sector fund sizes, and more)
Analyzing the likely motives of other classes of investors (margin balances, short interest, etc.)
Price Momentum and Mean-Reversion
Measuring asset classes and sectors using fundamental metrics? (Fed model, sector weightings, Q-ratio, etc.)
Investor sentiment surveys
How to use analyst opinions, if at all?
News reporting and reactions of stocks to news
Odd bits of news (CEO behavior, little things that indicate a qualitative change in the life of a company)
Insider buying and selling
Commodity market data (COT, etc.)
Bond market behavior (credit cycle, Fed moves, Credit Default Swaps, and more)
Changes in the capital structure (M&A, equity/debt issuance, etc.)
Monitoring the greats (13F filings)

No one can use all of these indicators.? You can probably only use a fraction of these indicators.? But being aware of how others view the market can widen your perspective, and help to reduce negative surprises on your part.

Quibbles

By its nature, since the book cuts across a wide number of areas in 216 short pages, you only get a taste of everything.? I liked this book, but there is room for a second book in this area — one of additional indicators passed over (I have a bunch!), or going into greater depth on the indicators covered.

Who will benefit from this book?

You have to have a quantitative bent, at least to the level of being willing to go out and collect simple data in order to benefit here.? Now, most serious investors do that, so I would say that serious investors can benefit from the “cook’s tour” of market indicators that this book gives, unless they are so serious that they know all of these indicators.? (Like me.)

If you would like to buy the book, you can buy it here: Market Indicators: The Best-Kept Secret to More Effective Trading and Investing.

Full disclosure: This book is unusual for me in two ways.? First, the author (not the PR flack) sent me a copy, with a nice handwritten letter thanking me for my blog and my assistance.? That is why there is the second reason.? Pages 80-81 summarize the longer argument made in my blog post, The Fed Model, where I take the so-called Fed model, and rederive it using the simple version of the Dividend Discount Model, giving a more robust model with reasonable theoretical underpinnings.

I earn a small commission from Amazon for anyone entering Amazon through my site, and buying anything there.? Your price does not rise from my commission.? Don’t buy anything you don’t want to buy if you want to reward me for my writing.? Only buy what you need if Amazon offers you the best deal.

Book Review: The Bogleheads’ Guide to Retirement Planning

Posted on 22 October 2009 by David Merkel

This was a book that I did not ask for.? Wiley has been sending some books unsolicited.? I’m not glad on all of them, but I am glad they sent this one.

Much as I admire Jack Bogle, I am not a Boglehead.? Low fees?? Yeah.? Diversification without overdiversification?? Sure.? Asset allocation?? Top priority.? Passive investing?? Best for most of us, but not me.? Quantitative methods don’t work?? Sorry, they do, if done right.? And aside from all that, I think (unlike Jack) that unhedged foreign bonds are a core part of asset allocation, especially if used tactically.? (Buy them when little looks good in domestic fixed income, like now.)

But in skimming/reading this book, I came away impressed with the acumen of those that call themselves “Bogleheads.”? They are not just dittoheads, but people who have thought hard about the retirement planning process for average individuals.

There is a decent amount of advice on tax planning.? What sorts of vehicles will make sense for most people?? How much can be contributed?

There is a decent amount of data on the usefulness of insurance, and it tends to follow my understanding of matters:

Avoid combination products unless you have a specialized tax planning need.? Keep savings separate from protection.
Don’t forget disability and health insurance.
Immediate annuities can be a useful replacement for some of the bonds in a retiree’s portfolio.

A small amount of the book deals with investing proper, but what is there is good, if simple.? It posits fund investing and passive investing, which again, is best for most people.

Another part of the book deals with the neglected liquidation phase.? How to do it?? What to tap first?? When should one file for Social Security, and what games can be played there?

Finally, the book considers what can go wrong in life (divorce and other disasters), and how to bounce back; also, how to find a good professional to help you with your specific needs, which “one size fits all” does not cover.

Quibbles

The book really does not deal with the troubles that will come in Social Security, Medicare and federal/state/corporate pension plans.? Also, by its nature, tax law is ephemeral in the US — in an era of rising structural deficits due to entitlement programs, who can tell what the tax situation will be 20 years out?? 23 years ago, after the passage of the Tax Reform Act of ’86, who would have thought that we would create something materially worse in complexity terms than what TRA ’86 replaced?? Rates are lower, though, but I don’t see it staying that way for long.? We can look at Roths, but will the government preserve the tax-free treatment if things really get tight?

Also remember that this is a single purpose book — retirement, though they have some good sections on insurance and investing.? For a good, short, all purpose book on personal finance, consider Easy Money: How to Simplify Your Finances and Get What You Want out of Life.

Summary

That said, I found it to be a useful guide for average people that might not be up on the nuances of strategy for retirement that an average person might use.? Wealthy people should retain specialized advisors, because they will be aware of strategies that would not make sense for average people.

This was a book that I skimmed half and read half, because I’m familiar with the material and would just check aspects of sections that I was familiar with to see if they got it right.? If you want to buy it, you can find it here: The Bogleheads’ Guide to Retirement Planning.

Full disclosure: If you enter Amazon through my site and buy anything, I get a small commission.? Your costs remain the same.

The Good ETF

Posted on 9 October 2009 by David Merkel

What makes a good ETF in the long term?? My, what a question, driven by the ETFs challenging the limits of what is prudent.? Maybe it is easier to start with what makes a bad ETF, then:

Headline risk can be eclipsed by credit risk.? All ETNs, Currency ETFs, and ETFs that use non-exchange-traded swaps, sometimes for commodity funds, take credit risk.? Did you know you were taking credit risk?
Roll risk — for commodity funds, trying to replicate the returns of the spot market using the futures market works only when there aren’t a ton of funds trying to do so.? The flood of funds into front month futures contracts incites other funds to front-run the activity, capturing the profits that the commodity funds were trying to make.? (For storable commodities, better to take delivery and store.)
Market size risk — an ETF can become too large relative to liquidity or regulatory constraints of the market, and it no longer tracks its benchmark well — again, mainly a commodity fund problem.
Irreplication risk — This is mainly a bond market theme, but once the ETF defines the index, only index bonds can be bought in proportion to the index.? I ran into this personally in 2002, when I ask ed why a certain bond traded rich.? The answer came that it was in a common index, but it was a small bond issue in proportion to its weight in the index.? Many investment banks were short the note to provide liquidity, but could not source the bonds to cover the short because most were in index funds.? I would keep an eye out for those bonds, and would sell them to those short for a small markup when I found them.? For ETFs, the trouble is that arbitrage can’t take place, because bond buyers can’t find certain rare bonds in order to create new units in exchange for expensive ETF shares.? That is one reason whey NAVs get stretched versus market prices.
Abnormal or faddish theme — the risk is that they become too dominant in the trading of less liquid companies in their ETFs.? But away from structural risks is the faddish investment risk.? The ETF only gets created as the fad is about to go into decline.

In one sense, the market can reward non-consensus views, particularly when they are small compared to their relative advantage in their sub-markets.? In the same way, the market can punish those that become too large for the pond that they swim in.? Growth will be limited or negative.? Even the efforts to create more capacity, create it at the cost of credit risk.

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.