Saturday, April 30, 2011

Commodities About to Crash? But Why?

Everything is booming!

Investors need not look far these days to know that commodities have been doing extremely well. Thanks to late night infomercials, "We Buy Gold" kiosks springing up in shopping malls and gold parties becoming the pampered chef of the new decade, the commodity boom is obvious to even the most casual of investors.

  • Gold is booming.
  • Silver is booming.
  • Copper is booming.
  • Oil is booming.
  • Cotton is near historic highs.

But according to this MarketWatch article (humorously subtitled: Everyone hearts commodities), the party is about to end.

Meet the man.

Jeremy Grantham is the chairman of Boston fund firm GMO, and he sees this boom-time quickly coming to an end.

He's gained credibility calling such things in the past: he warned about the 2000 bear market as well as the 2008 crash.

Interestingly, while Grantham is warning that commodities are about to crash, he is a huge bull on commodities long term - He thinks we're running out of everything.

But why?

Grantham's reasons for the impending plunge are simply:

  1. Agricultural commodities are set up for a fall.
  2. China is about to go bust.

Regarding agriculture, he believes we've just come through the worst year for farmers in generations. He points out that this year is likely to be a bumper crop year as farmers seek to regain some of what was lost last year, resulting in an oversupply relative to last year and thus sending prices downward.

"Agricultural commodities ", he says, "are quicker to respond to prices than almost any other. Farmers just plant more crops."

As for China, Grantham says he sees China expanding too fast to be sustainable. He sees too much infrastructure and too much debt, and when China cools (or crashes) it will take commodity prices with it.


What he doesn't mention.

What he says makes a lot of sense to me, but there are a few other driving factors he just doesn't mention.

For one, there's the push to use corn crops for ethanol. That's playing a sizable part in drive up food costs, but probably not enough to warrant the current prices. Besides, I think he's probably focusing on other agriculture commodities like coffee, which has seen a meteoric rise of late, due to weather impacting crops.

Another unmentioned driver is the U.S. Government's reckless spending binge.

Fear of the collapsing dollar and its eventual end as the reserve currency, and fear of what that would mean for paying back the 14 Trillion in debt have driven the price of gold and silver through the proverbial roof. With the recent warning of a down grade by the S&P, I don't see this fear abating any time soon. Do you?

Wednesday, April 27, 2011

How CAMAX Found a Home in My Portfolio.

The Cambiar Aggressive Value (CAMAX) fund appeared on my radar recently when I was looking for funds to add some exposure to value based investing to my IRA portfolio.

Attributes of the fund

  • High turnover rate: 205%
  • Expense ratio: 1.35% (1.71%)
  • Highly concentrated - only 15 to 30 stocks.
  • Returned 68% from Feb. 2010 to Feb 2011 (before taxes, fees, etc.)
  • Management (Brian Barish) has a good record.
  • Management has a high degree of latitude when seeking out investments.
  • Exhibits above average swings, due to the fund's narrow focus.


Some thoughts on these aspects...



High turnover rate - who cares?

The high turnover rate should signal two things to investors:

  1. The management team is not shy about seizing opportunities.
  2. There is likely to be a large(r) impact on your capital gains in any given tax year.

Taken by themselves, these points are neither good nor bad - it depends on your situation.

In my case, these are good things or at least negligible since I am considering funds for my IRA. Since all gains in an IRA are tax deferred, I don't have to worry about the tax implications. There are none.

The fact that management is aggressive at seizing opportunities means they will be constantly working to find the right place at the right time, which should mean higher returns (if management is doing their job) as other implications as we shall see...

Just what is the expense ratio anyway?

You may have noticed two different expense ratios: 1.35% and 1.71%. Both figures are printed throughout various financial sites, so which is the right one?

Well according to their prospectus:

The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, Acquired Fund Fees  and Expenses, and extraordinary expenses) from exceeding 1.20% of the Fund's Investor Class Shares' average daily net assets until September 1, 2011. In addition, if at any point it becomes unnecessary for the Adviser to reduce fees or make expense reimbursements, the Board may permit the Adviser to retain the difference between the Total Annual Fund Operating Expenses and 1.20% to recapture all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement (or any prior agreement) was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on September 1, 2011

So, it looks like 1.35% is the current, reduced expense ratio and after September, 2011 expenses will resume their normal 1.71%.

It is interesting that the board and the adviser made this agreement, but I'm not sure what to make of it to be quite honest. I'd prefer an expense ratio of 1.35% to 1.71%, but I'm not sure 1.71% is expensive for the kind of performance this fund has put up and given the fact that it's a very actively managed fund.

The good and bad of high concentration

As noted above, the average number of holdings for this fund is between 15-30 stocks. This presents a fairly concentrated group of holdings which results in both outsized returns and outsized losses compared with many of its peers, and the overall stock market in general.

For example, CAMEX returned 68% for the most recent year, while the S&P 500 return for the same period was 21%. In fact, it's out performed the S&P 500 every quarter since its inception except one - Q4, 2008. In 2008, it lost 44% - 7 points worse than the S&P 500.

But, volatility isn't necessarily bad. It just means that the fund is not for the faint of heart or short term investor. Since I'm adding this to my retirement account, and my retirement is 30+ years away, my holding period is the same as Warren Buffett's - forever. Or at least until the performance breaks down completely. ;-)


Management

Since the fund has a high concentration in a relatively few number of holdings, management is perhaps a bit more important than in a stock fund with broad holdings or one that merely tracks an index.

Barish has only been at the helm of CAMAX since 2007, but his record at Cambiar Opportunity (CAMOX) from 1998 to 2007 was good. His performance since 2007 has been quite good, although I know that much of that success stems from the economy recovering from a dramatic sell off in late 2008. Even a monkey could have made money in the stock market from 2009-2011!

That being said, I like where his focus is and he's made more than the market in general. I also like the fact that he is allowed free reign in his picks - provided they fit a recipe of value-oriented factors:

  • Low price-earnings ratio relative to historic norms and peer group.
  • Low cash flow multiple relative to historic norms and peer group.
  • New product and/or restructuring potential under-appreciated by the marketplace
  • Sudden stock price decline caused by flight of "momentum investors" with little change in fundamentals
  • Excessive investor pessimism in relation to overall outlook for company over the medium to long term.


I should also point out that the bulk of the management team under Barish has been with Cambiar since the late 1990's.

Tuesday, April 26, 2011

Do You Know Your Core?

I came a cross an interesting article at Morningstar this morning about core holdings.

It's by Christine Benz, and she address a reader's concern over her stating that what the reader considers his core holding is not a core holding. The basic gist of the article is that it depends on what your definition of the word "core" is. The most common usage of the term is to describe a broad-based fund that covers a large swath of investment territory (asset classes) in which you should place the bulk of your holdings.

Of course, that's likely to be different from investor to investor because every investor's style and goal is going to be slightly different.

She also briefly describes other terms commonly used to determine whether a fund or stock would typically be considered a core holding, like it's R-Squared value.

Her take: Just because most people shouldn't use an aggressive bond fun as their core holding, doesn't mean no one should. Do what makes sense for you, and understand why you're doing it.

Know your definition of core, and follow it.

Monday, April 18, 2011

Cost Effective Gold Buys.

Barron's has an article that details how to use the GLD ETF, puts and calls as a cost effective way to buy gold.

It all hinges on the effect of the Federal Reserve's QE2 ending in June. Basically, anyone buying gas, food or other non-durables isn't buying the Fed's stance that inflation is negligible and is seeing an big increase in inflation. Just how this is going to play out when the Fed ends it's latest round of Quantitative Easing is debatable.

Jim Strugger, a derivatives strategist with MKM Partners, advises using a relatively simple trade benefit from any GLD advances that may be triggered by the end of QE2:

"When GLD was trading at $142.05, Strugger told clients to buy June $150 calls on GLD, and to sell the June $135 put to position for the exchange-traded gold fund to trade above $150 by June. The strategy, known as a "risk reversal," lowers the price of a bullish position by selling a bearish put."

Read more here.

Wednesday, April 13, 2011

Time to Dump Treasuries?

News flash - the reckless government spending, and big government is bankrupting the United States!

Yeah, ok... so that's not news. But this might be.

Bill Gross, one of the chief investment officers at bond giant PIMCO, is betting against the United States. Seeing continued weakness in the dollar and increased inflation, along with a lack of buyers for treasuries once the treasury stops buying its own debt, PIMCO is selling its treasury holdings.

In addition, investors have been pulling money out of PIMCOs Total Return Fund for the past 5 months, reaching $1.59 billion in outflows last month alone.

Whether you see hard times ahead for the U. S. or not, this move cannot be ignored since PIMCO is one of the largest investors in the treasury market. That makes this move significant in and of itself.v

Tuesday, April 12, 2011

How To Invest In The Inflation "Story".

The Fed's official line is that there is no inflation because while prices are rising, wages are not. I'm no expert, but isn't that the definition of stagflation? The cost of living rising while incomes are not?

Regardless, Sam Stovall and CNBC see inflation as more of a news story, but one that you can make money on nevertheless. Here's how..


Stocks experience a sector rotation when the CPI crosses the 4% increase threshold. We're under 3% now, so when reports start rolling in that the CPI is over 4%, go for inflation hedges and defensive stocks:

  • Energy
  • Materials
  • Utilities
  • Health Care
  • Consumer Staples

Makes sense to me. After all, perception is sometimes reality and you don't need inflation to be real to make money on these investments, you only need most of the market thinks it's real.

Watch the full interview here:

Wednesday, April 6, 2011

Why Poor Man's Gold Will be THE Investment This Decade.

Gold beat everything in 2000-2010, but silver (a.k.a.: "poor man's gold") is going to outshine gold from 2010-2020.

At least the way Eric Sprott sees things. Here's why:

  • Once the government starts printing money (QE 1, QE 2...), people start to look toward preserving their savings. Precious metals act as a value store.

  • Money printing is a world wide phenomenon.

Couple that with the facts that silver has many more industrial uses than gold, and silver tends to move up along with gold and you can see where there might be increased demand. Some investors will start to grow wary of a gold bubble, and start to move into other precious metals. Silver is a great alternative.



3 Risks to precious metals (gold and silver) Investing:

  1. The performance becomes "maniacal" and is no longer rooted in common sense.
  2. Governments become fiscally responsible, stop printing so much money and live within their means.
  3. Governments make gold and silver their currency.



Tuesday, April 5, 2011

Time To Buy Irish Bonds?

Brett Arends makes a compelling case for Bonds from the Emerald Isle.

In short, 10-year bond rates for Ireland are about 10%, while the U.S. is 3.5%. U.S. Bonds are considered "safe" while Ireland is considered a high risk venture. But Arends' makes the point that unlike a junk corporate bond, Ireland can raise taxes and it's in the EU's best interest to do whatever it takes to keep one of its members from default.



Ireland would have to negotiate with its creditors to get its debt down by over 30% before an investor's return would drop below that of a U.S. 10-year bond (3.5%).

Basically, Ireland is going to suffer for it's reckless spending and debt binge, but U.S. investors can profit from Irish Misery.

I'm not sure how I feel about that, but I know I wouldn't put that much in a bond from Ireland right now. But I am considering adding some of that exposure to my portfolio along with precious metals.

Monday, April 4, 2011

Dow 38,820?!

Could the Dow hit 38,820?

The answer, of course is YES!

The question is when. According to Jeffrey Hirsch, who has written: Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It, the year will be 2025. As JLP notes, it's not that ridiculous of a claim. In fact, it's well within the statistical average of any 14 year rolling average of the Dow- 45% of the time, the Dow has delivered that kind of performance since 1929.

Saturday, April 2, 2011

ETFs A-Plenty!

I remember when ETFs had just hit the big time. They were all index funds, and mostly targeting broad based indexes at that. Not any more. Every year, hundreds of new ETFs hit the market and in increasingly narrow focus.

Last year saw 217 new ETFs and March of 2011 alone saw 700-800 new issues enter the pipeline! It's important to note that not all issues in the pipeline will become available to investors, but ETFs are clearly the hot new medium in investing.

Here's a CNBC article highlighting newly minted, narrow focus ETFs, including:

  • A Smartphone Index
  • Bear Market Index Funds
  • U.S. Denominated Debt

As the articles points out, these micro-niches ETFs are playing to a small market and are thus more risky since it's not only easier to get caught without a buyer when you're looking to sell, but the fund can close due to lack of interest.

I'll stick to the original, broad based index funds thanks.