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Sunday, February 10, 2013

No Suprise Here..

Barron' cover story Feb 9 issue

All in the Family

The Barron's/Lipper one-year ranking of fund families offers some dramatic moves and big surprises. Putnam, Pimco and Hartford top the list, while last year's winners slid to the bottom.

Friday, February 8, 2013

How We Invest A Presentation of My Approach to Investing

I put together a fairly comprehensive review of my investment strategy. You can find it here.

One more part of my investment approach not in the presentation: I never watch this guy....or anything else on CNBC.

But you can find Cramer's appearance on Jon is fantastic.

Tuesday, February 5, 2013

Signal ....and Noise in European Stocks

Monday Feb 4 European stocks represented by FEZ  the EURO Stoxx 50 closed the day down 4.7%. from the close on Friday Feb 1.

This from the marketwatch /WSJ website is typical of the  explanation for the decline yesterday throughout the media and market pundit commentary

"... investors fled the region’s bourses on Monday, as political jitters in Italy and Spain rattled sentiment and stoked new concerns of a euro-zone breakup. 
In Spain, the opposition party called for Prime Minister Mariano Rajoy to resign amid allegations of corruption, fueling fears of a general election that could pave the way for anti-euro parties.
Here are the top 10 holdings of FEZ. There is one Spanish bank and one Italian company ENI which is a global energy company. The list is composed of industry leading multinationals competing with other global giants such as those in the US. 
Top 10 Holdings (39.79% of Total Assets)
CompanySymbol% Assets
Banco Santander SABCDRF.BC3.97
Allianz SEALIZF.DE2.99
According to Yahoo Finance FEZ has a p/e of 10.93 a 21% discount to the S+P 500 at 13.25.
I cannot think of a credible economic reason for the Euro Stoxx 50 to selloff 5% based on the news from Spain and Italy. Stock prices can deviate from value in the short term but seldom in the long term. One needs to distinguish signal (long term moves) from noise (especially daily moves). It seems pretty clear to me that yesterday's move was noise.
Here's bloomberg at the Feb 5 European market close.
Feb. 5 (Bloomberg) -- European stocks climbed the most in almost four weeks as companies from Munich Re to BP Plc beat earnings estimates and a measure of euro-area services output shrank less than forecast
and Reuters recorded this gem from a market participant
"Yesterday's spotlight on Southern Europe was just an excuse to book profits and catch our breath. The trend is still positive, and clients are slowly coming back to equities," said Patrice Peroise, a trader at Kepler Capital Markets.

As of this writing  a little over 2 hours before the market close in the US. FEZ is +1.6% for the day.

The WSJ Forgets About Dividends and Total Return...And Misses the Reason for the Move In High Yield Bonds

In the never ending effort of financial journalists to read the tea leaves of short term market moves, the analysis is say the least shoddy. Take the WSJ's effort today to find some major turning point in short term movements to HYG the high yield bond ETF.

The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund (HYG) suffered its seventh-straight loss Monday, closing at its lowest level since Dec. 28. That is the longest losing streak for the fund since a nine-session stretch ending April 10, 2012.
The HYG slumped 0.4% to $93.09 Monday and has shed 1.9% since peaking at a 4 1/2-year high of $94.88 Jan. 24. The S&P 500 lost 1.2% Monday to 1495.71, after having closed at its highest level in more than five years Friday
Seems like the WSJ forgot about something called dividends and total return. Investors capture total return not price only return. So even though HYG closed at its lowest level since Dec 28, HYG investors have had a total return of 

Furthermore the WSJ suggests that the move in HYG reflects concern about the riskiness of the bonds in terms of credit risk
While the HYG’s fall could be seen by some as cash potentially leaving bonds for riskier assets–potentially a bullish sign–equity investors shouldn’t count on that money finding its way into higher-risk stocks.
Nearly 100% of the HYG’s holdings are corporate bonds from companies like Sprint, Chrysler, and Ally Financial with credit ratings below investment grade, also known as junk bonds. Given their risk profile, high-yield bonds tend to trade a lot more like stocks than investment-grade bonds. Over the past two years, the correlation coefficient between the HYG and the S&P 500 is 0.89, where 1 indicates perfect correlation. Meanwhile, the correlation between the HYG and the iSharesBarclays BARC.LN +1.29% 7-10 Year Treasury Bond ETF (IEF) is 0.27.
While the HYG’s recent slide is no guarantee a stock selloff is imminent, bulls who have enjoyed a nice run over the past few months may not want to tempt fate.
While the point about long term correlations is correct, it is certainly not the explanation for the selloff in HYG, NYG an intermediate term high yield bond fund sold off because of interest rate changes. All intermediate term bond ETFs sold off during the period. In fact HYG has performed better than investment grade intermediate term corporate bonds (LQD) and intermediate term treasuries (IEF). So in fact high yield investors because of the higher yield did better than other bond investors in intermediate term .

Further proof that it was the interest rates and not a change in perception of credit risk that drove the price change can be seen in the performance of the short term high yield bond ETF SJNK. If the downward move was driven by credit risk and not interest rate risk one would expect intermediate term(HYG) and short term (SJNK) high yield bond funds to move in tandem. But the exact opposite happened...sjnk went up when intermediate term investment grade bonds and intermediate term treasury bonds went down. In other words it was the interest rate risk not the credit risk that explains the declines in intermediate term investment grade and treasury bonds...and the underperformance of intermediate term vs. short term high yield bonds.

Bar charts top = total return bottom = volatility Dec 28,2011 – Feb 4, 2012

 GROWTH OF $100,000 Dec 28 2012 –Feb4, 2012 (HYG gold, SJNK blue  LQD black IEF green)

GROWTH OF $100,000 (HYG gold, SJNK blue  LQD black IEF green)

Friday, February 1, 2013

A Pretty Savvy Move In My Opinion By The Central Bank of Israel...WIth the Assistance of Goldman Sachs

I'll leave others to make a judgement

The 10.5-year and 30-year bonds will help the treasury close the projected giant hole in the government's 2013 and 2014 budgets.
Some $1 billion worth of 10.5 year bonds were issued, with a yield of 3.213 percent, 125 basis points above the United States's Federal Reserve rate for 10-year treasury bonds.
Another $1 billion worth of 30-year bonds were issued with a yield of 4.588 percent, some 145 basis points above the Fed rate for 30-year treasury bonds.
Investor demand for the bond issues exceeded $9 billion, some 4.5 times the actual amount issued. In response to the high demand from large strategic investors, Israel's treasury decided to issue more 30-year bonds than originally planned, reaching a total of $1 billion. The issuing of such a large number of 30-year bonds is reflection of the treasury's policy of increasing the average duration of Israeli government debt and significantly reducing the risk of rolling over government debt.
"This is a vote of confidence in the Israeli economy," said Finance Minister Yuval Steinitz, following the successful bond issue. "The fact that we continued to reduce debt relative to GDP in all recent years…has generated confidence among investors in the strength of the Israeli economy. This achievement is particularly remarkable given the ongoing debt crisis in Europe."   
The latest bond issue was the Israeli government's 10thdollar-denominated bond issue. The previous foreign currency-denominated bond issue was in January 2012. Israeli government dollar-denominated bonds are used by investors as a reference point for pricing the systemic risk in the Israeli economy. The latest bond issue represents the lowest cost for a dollar-denominated bond issue paid by the Israeli government and historically narrow interest rate spreads.
By the end of the bond offering, 95 percent of the bonds were acquired by non-Israeli investors hailing from 34 different countries.
Barclays, Goldman Sachs Group and Citigroup were the underwriters of the issue.
Stanley Fischer the esteemed Central Bank Governor announced his resignation the day before the issuance.
Here's what happened to the bonds

Did the State of Israel make a monkey out of you?

Global investors are entitled to feel duped by the resignation of Stanley Fischer less than a day after Israel raised a $2 billion overseas debt offering.

On Monday night, Israel raised $2 billion in an overseas offering of debt, in two series: one of 10-year bonds and one of long-term 30-year bonds. The accountant general's people over at the Finance Ministry said the investment community pounced on the debt. Demand soared to $9 billion, some 4.5 times the amount Israel sought to raise.
Moreover, the offerings closed at very low levels of interest, indicating that investors feel warm and fuzzy about Israeli state debt. The 30-year bonds closed at a spread of 1.45% over comparable U.S. government bonds, while the 10-year bonds closed at a spread of 1.25%. Those are very low spreads. They indicate, in theory, that investors feel Israeli debt isn't that much riskier than American debt.
The heavy demand coupled with the low spreads boil down to this: Investors badly wanted the goods. The demand and spreads are a sort of trophy for the Israeli economy and its leaders, and indeed the people over at the accountant general's office were strutting around like peacocks.
It's such a pity that the celebrations were abruptly truncated not a day later. The very next afternoon, Tuesday, Stanley Fischer up and quit as governor of the Bank of Israel, 22 months before his contract runs out.
Fischer will be staying on until June, but in response to the announcement, Israeli bonds – such hot stuff just the night before – abruptly dropped 1% in price.
Hmm..savvy time for the central bank + Goldman Sachs involved in the offering....
shab... shal .)