Archive for August, 2009

6 things to look at before buying an ETF

By: ispeculatornew | Date posted: 08.31.2009 (5:00 am)
Bear marketThis will be to no surprise for any regular readers but we at IntelligentSpeculator are fans of ETF’s, they provide such an easy and transparent to trade the markets. There are of course many reasons to use them but generally, I think they are the most appropriate investments for smaller portfolios. Let’s be honest, ETF’s are the easiest way to have a diversified portfolio that can be re-allocated easily.

Of course, when you have a few million dollars, the fees charged by most ETF’s are a bit expensive. But most of us, unfortunately, do not have millions to invest. So between mutual funds and ETF’s, the choice is very easy. But with that being said, now more than ever, new ETF’s are born every week it seems and they might not be all that great to invest in.

Here are a few criteria’s we believe to be important when looking for a suitable or acceptable ETF:

1-Annual fees

This might be the most obvious point, but it is not as straightforward as you might think. Actually, while ETF’s do generally have very low annual fees, not all of them do. It is important to look at them when considering buying ETF’s for a long term investment. It is difficult to give a number to look for as it really depends on the type of ETF. Generally, ETF’s that invest in US equity markets should have very low fees, of .50% or so. But ETF’s that invest in emerging countries will and should have higher fees. After all, the managers will face higher trading, execution and even legal fees. That is one of the costs of business when dealing in emerging or frontier markets.

2-Liquidity

This is one of the most underestimated criteria’s. While there are new ETF’s every day, some of them have so little liquidity that you will be paying enormous “fees” in bid-ask spreads. Basically, imagine a stock that is worth 10,50$ but you must pay 11$ to buy it and once you sell it, you will get 10$. That would imply a 1$ spread (10$ bid, 11$ ask). You would lose 1$ (almost 10%) on the trade even though you actually made an investment that did not lose any value. Crazy isn’t it? I think it is one of the biggest mistakes made by investors when choosing an ETF.

There are generally two things to look at when considering the liquidity. First off, you want enough size to be available. As a rule of thumb, I like to trade no more than .1% or 1% of the average daily volume. Because if you try to buy a 1000 units of a stock that generally as 10,000 traded, you will have an effect on the price and will end up paying higher.

At the same time, a good way of looking for liquidity is to look at any time during the day at the bid and ask on the ETF. Generally, a very liquid ETF will have a bid -ask close to 0.01$… So a bid 10.49, ask 10,50. It can get a little worse than that but I personally do not really consider stocks that trade at a bid-ask of more than 0,10$, it is simply too illiquid and risky.

3-Underlyings

Generally, you can easily find out what is owned by an ETF and take a look. You will get an idea of what it does etc. It could turn out that you are easily able to replicate the ETF and could end up paying fewer fees.  For example, I had written about target date funds that basically give you a one stop option investment possibility. I had considered investing in it but then noticed it only had about 7 or 8 underlings’. In such a case, especially for a 30 year investment, I will be better off investing in those 7-8 funds myself instead of paying the additional fee to the target date fund manager.

4-Company behind the ETF

Like any other investment, it is worth taking the time to look into the company that is managing the ETF. Is it reliable, profitable? Those are all good questions. I personally like Ishares a lot because they are so huge, have a good reputation and while they have recently been sold, they are still owned by a very reputable company in Blackrock, now the largest fund manager in the world. Picking smaller lesser known companies might give you a slightly better chance of investing in a fraud like those we’ve recently witnessed, unfortunately.

5-Prospectus

Depending on the fund, it can be a good idea to take a look at the prospectus of an ETF. While an ETF that tracks the S&P500 is fairly straight forward, others such as leveraged ETF’s and/or those investing in commodities are subject to many other criteria’s that you might not know before investing. For example, knowing if a fund invests in physical natural gas or in companies that produce the physical gas makes a huge difference and yet many confuse the two.

6-Past performance (vs. index)

It is always good to compare the return of the ETF in the past year or more to the return of what it is tracking. If the S&P500 is up 10% for the year and your ETF is only up 2% or is up 18%, you should investigate. Of course over performing is good, but you have to wonder what caused this as it could result in an underperformance the next time around.

So those are the basic things we personally look at when trying to evaluate an ETF, what about you?

Financing Ramblings

By: ispeculatornew | Date posted: 08.29.2009 (1:09 pm)

financial-planningThis week was another down week for Natural Gas as it merely escaped slipping undr the psychological 3$ level. How much lower can it go? Without further wait, here are some of the better posts/articles that I read this week:)

-I always wonder why people argue that a .50 or 1% difference in management fees (especially between mutual funds and ETF’s makes a huge difference over time), here is a good example!
-TFB discusses the different types of investors, which one are you?:)
-It’s an endless debate and frankly one I always wonder about myself, borrowing to invest?
-MTJ makes a new trade selling BA puts naked, will it pay off?
-GLBL, what are the 7 numbers you should look at when fixing your financial situation?
-A very good guest post on Four-Pillars about leaders training
-Another debatable point, does diversification rule?
-A subject discussed too rarely, lifestlye inflation and how to deal with it, by MDJ
-Morningstar discusses 4 sector ETF’s that arer recommended
-Missed out on the huge debate about commodity fund limits, here is a good summary
-Wow.. would you be better off in terms of pay while working for the Federal Government? You bet..

Do small caps offer diversification?

By: ispeculatornew | Date posted: 08.28.2009 (5:00 am)

It is often said that a portfolio will offer a better return, especially compared with its risk when diverisification is used. Of course, there are many many different ways to view diversification but generally, investors diversify their portfolio through asset classes and among them. For equity, generally the biggest portion of a portfolio, that diversification can be made through various ways as well but one of the more used ways is to buy both small caps and large caps.

Generally, companies are rated according to their market capitalisation as bigger companies will of course be worh more. With that generally comes smoother results. You would certainly expect a major company like Dow Chemicals to perform better in a downturn than a small chemical company right? But surprisingly, as do many other assets, they all seem to move together in stress periods and the 2 graphs from the previous year do tell a lot.

The first one is the correlation between the S&P500 and the Russell 2000. As you can see, it seems like the return of the 500  biggest companies is almost exactly the same as the return offered by the Russell 2000 which tracks 2000 generally smaller companies. Currently, the correlation is at .9457

graph1

Even more surprising is the next graph. I figured that the comparison might be even more interesting using the Dow Jones Industrial average, an index that includes only 30 companies. The Dow Jones generally includes 30 of the most important companies in the US. Again, you can see that the Russell 2000 is almost perfectly correlated to the Dow Jones in the past few months. Quite impressive isn’t it? Currently, the correlation is at .9902

graph2

Is this relationship going to remain for a long time? Probably not. But it’s always interesting to see that in periods like the one we have just experienced, there really are very few assets or places to hide in.

Jetblue uses “brilliant marketing”?

By: ispeculatornew | Date posted: 08.26.2009 (5:00 am)

jetblue2Since it was created (probably many many centuries ago), marketing has always been about getting attention, getting a message or an idea across and more often than not, it is just about getting its name out there. In the Airline industry, that is always quite a challenge as most consumers have only one criteria when shopping for airfares; price. And while JetBlue has been more than competitive, there has and always will be a lot of value in having a brand associated with pleasure, good service, etc. Because that means that consumers will probably choose your company if they are offered the same fare for a trip. And even better, they might even accept to pay a little more to board your airline at some point.

JetBlue has been a leader in advertising and certainly made quite a splash a few days ago when it launched an “All you can fly” ticket for sale. We will perhaps never know what the strategy was behind the move. The most obvious reason would be to get more passengers aboard in a slow economy. But look a little deeper and you will see that this special made the news everywhere, generating a buzz about the company that would be difficult to generate without a unique idea like that. The catch of course is that such an idea could end up costing a lot if millions buy the “All you can travel” ticket and reserve seats that could otherwise be sold. But JetBlue only had this promotion open for a few days, perhaps just enough to get the word out on the internet about its great idea.

I personally think it is brilliant and certainly something that other companies could and should get inspired by. It would be easy to imagine possibilities. Let’s say Microsoft offered the Zune with unlimited life downloads of music for a few days. It might lose some money on all of those sales but the return in branding could be even better. There are many ways to go about it but the end idea is that like any other marketing campaign, JetBlue was creative and it seems to have paid off. A lot more companies would do well to use a little imagination….

Why Apple (AAPL) will be almost impossible to stop

By: ispeculatornew | Date posted: 08.24.2009 (5:00 am)

fRemember those days when the RIAA was complaining about customers no longer buying music? Well, turns out they are although the model has changed. And so has the power as it has shifted towards Apple. Thanks to this nice graph from Sillicon Valley Insider, we can get a better idea of how dominant the company ran by Steve Jobs truly is. They are to digital content what Amazon has been to physical content like books.

It is no surprise that Apple is so dominant in musical sales of course as it has such a dominant share in music digital players thanks to its Ipod. But of course, with the growing sales of the Iphone, many other features will be coming. The most obvious right now is the “Applications” market, which has such a range that there is no end in sight. With every game, digital book or movie being sold, Apple gains not only profit but also power as its Itunes gains more and more control. In fact, it is quite interesting right now to see Google trying to fight Apple over the recent rejection of an application designed by Google, “Google Voice”; you can read about it here as the FCC is now involved in the matter.

There are now increasing rumours of an upcoming “tab” that would compete with Amazon’s Kindle, which could gain an important share of the digital book market but also potentially become an entry into the future world of newspapers/magazines.

Personally, I have been a happy blackberry user for a couple of years now but even I am starting to think about switching to the Iphone when my contract comes up for renewal because of the increasingly impressive list of features being offered. More and more, it seems like non-Iphone users are being left out of the party, not the best feeling in the world I would say.

As well, at this point, there does not seem to be anyone close to being able to compete with Apple in these markets. Microsoft, Sony and Amazon are all working on alternatives but it almost seems like the only problem Apple will have might be with anti-competition authorities in the US (because of the fact that it blocks other hardwares from connecting to its Itunes as well as because of its increasing power of negotiation when it deals with content suppliers that wish to sell their items on Itunes.

It will be very interesting to see but I would argue that Apple is in a very strong position right now!

Financial Ramblings

By: ispeculatornew | Date posted: 08.22.2009 (9:51 am)

ngA lot of interesting things going on in the markets but the collapse in prices of Natural Gas (it just hit a 7 year low even as oil prices continue to go higher, a trend few believed possible even a few months ago, and yet it keeps going and going, as well as the hype surrounding the problems of ETF fund UNG are at the top in my opinion. With that being said, here are the most interesting readings I enjoyed last week:

-From Seeking Alpha: Natural Gas: Was Thursday capitulation day?
-Zach discusses how Chart Industries is riding the current Nat Gas trend
UNG takes baby steps towards reopening
-MDJ discusses how to save money while travelling!
-Get Rich Slowly discusses the differences between high and low earners!
-GLBL has a take on when you should declare bankruptcy
-Even though he missed (barely), very nice saving done by MFJ
Should a girl check on her man’s credit?🙂 See reactions here
-What is your take on going out and making a real estate investment by Financial Nut
-TFB discusses the idea of withdrawing money from the markets once you reach retirement

The best business model??

By: ispeculatornew | Date posted: 08.21.2009 (4:00 am)

lottery-of-birthWhat would you do if you could have a business model with almost no risk, a 70% profit margin at worst and no innovation or research to work on? That is pretty much what the lotter business enjoys. Even though they make the headlines when they offer prizes that can often reach hundreds of millions of dollars, the fact is that they have the best odds of all. For each ticket of one dollar, they might give you a 1/50,000,000 shot at winning $5M.. that is a 90% profit margin. Sure, you might be unlucky and have a few lucky players. But since it is possible to get insurance on all gains, you really have nothing to lose now do you?

The problem of course is that in most places, especially in North America, lotteries are public games run by the government. No surprise of couse as it is an important source of revenue for the state and provincial governments and they thus have very little incentive to let it go.

It will be interesting to see how this evolves as the government does of course have a difficult role as it also must try to prevent its citizens from being addicted or having gaming addiction problems. Not an easy thing to balance when you consider that the government wants as many people as possible to participate in these lotters and games. As well, lotteries can be seen as a tax for the poor. Studies have shown time and time again that those most eager to enter lottery or other luck games are often the least fortunate, and it becomes very difficult morally for governments to continue to take money from the poor when it usually is designed to do the exact opposite. The sense is usually that private companies would only have 1 goal in mind; profits. But do you think the government is really trying to do anything different?

What do you think? Do you agree with governments running such lotteries? Or do you think they should let the private sectors take care of it but impose taxes on those companies? Another point to consider is that usually governments to not feel like they have to disclose what they do with the huge lottery profits. It is often completely unknown where the money was spent and what was done with it because the reality is that most citizens care about one thing only; if they won or loss….Estimates are that a state like California could earn between $16 and $37 billions per year by leasing lottery rights. Such amounts of money could certainly do a lot of good…

Emerging makets vs Frontier markets

By: ispeculatornew | Date posted: 08.19.2009 (4:00 am)
Pyramids of GizaIn 2009, the world is seen by many as smaller than ever, or “flatter than ever”. That is certainly true of finance as capital flows around the world. However, countries have very different levels of structure which can result in different degrees of complexity in their capital markets. In geographical terms, the investments are usually classified as following:
US
Japan (not always, but often separated)
Developed markets (most of Europe, Canada, Australia)
Emerging markets (BRIC’s, etc)
But an often overlooked category is the “frontier” markets. They are not as common for many reasons but will probably become more known in the coming decades. Frontier markets are generally countries that are fairly poor, including most of Africa. These countries offer limited investment opportunities and are often very illiquid investments. So why invest in such a region? Precisely for those reasons actually. Because these countries make investing considerably more of a challenge, many investors do not even consider venturing in frontier markets which creates good opportunities for investors that are looking for long term uncorrelated investments. Of course, the objective is to pick those frontier countries that will soon be known as “Emerging countries”.
In reality, there are no clear standards as to what makes a country “emerging” or “developed”. In fact, countries like Kenya or even Vietnam or often among those in the “frontier” markets group. There are of course many ways to describe what should or should not be a “frontier market” but generally, Morgan Stanley is one of the more reliable sources. They currently have 28 countries listed as frontier markets:
-Bahrein
-Botswana
-Bulgaria
-Croatia
-Estonia
-Ghana
-Jamaica
-Jordan
-Kazakhstan
-Kenya
-Kuwait
-Lebanon
-Lithuania
-Mauritus
-Nigeria
-Oman
-Pakistan
-Qatar
-Romaniaa
-Trinidad and Tobago
-Saudia Arabia
-Serbia
-Slovenia
-Sri Lanka
-Tunisia
-Ukraine
-UAE
-Vietnam
It is quite a list isn’t it? Usually, it is almost impossible for individual and even many institutional investors to make direct investments in these countries so they usually invest indirectly through funds/etf’s. That helps us avoid all the legal and technical issues in order to get direct exposure. As well, it is very difficult to invest in individual companies as the information available is usually much more difficult to obtain than from companies in developed markets. As well, the accounting and other standards could be very different which can make it difficult to compare companies.
Even now, with thousands of ETF’s available to investors, very few cover frontier markets efficiently, mainly because the costs involved are so great. Some mutual funds do offer opportunities but I would again stick to ETF’s and while I expect some more interesting ones to come along soon, here are a few that you can already look into:
VNM – Market Vectors Vietnam
AFK – Market Vectors Africa
MES – Market Vectors Gulf States
FRN – Claymore/BNY Mellon Frontier Markets
Do you know of any others?

Think Japan being out of a recession will help stocks go higher? Think again

By: ispeculatornew | Date posted: 08.17.2009 (5:00 am)

japan_overview_2The spectacular rise in North American markets in 2009 has created the fear of a rellapse as many think the market might be overly positive. This weekend was a good example of why. Japan, the world’s #2 economy, is out of a recession with an impressive 3.7% expansion in the last quarter. But if you think the markets have been impressed, I can tell you right now that you are wrong, very wrong.  JP Morgan senior economist Masamichi Adachi said “the basic contours of the growth is what we had expected: Consumption, exports and public works all contributed to the positive side.”

In fact, when the numbers were announced, the Nikkei index actually dropped 2,4% prompting many to wonder what investors were actually anticipating. That problem might occur when numbers start to turn positive in the US as investors might be expecting a V-shaped recovery which most economists agree is very unlikely.

To be fair, Japan’s GDP was due to rebound after dropping a spectacular 11,7% in the last quarter, a number that is difficult to even imagine for most US investors. Of course, Japan’s economy always provides a good view of the world economy as an important portion of its economy is based on exports, of cars, technology, all things that have been going through very difficult times in these tough economic times.

Now the question remains how investors will react when the US actually does move out of the recession, especially considering a lot of the current growth actually originates from the US government as long as that is the case, it can be viewed as being unsustainable by many….

Financial Ramblings

By: ispeculatornew | Date posted: 08.15.2009 (10:25 am)

vietnam

I should be able to visit Vietnam in 2010, and had been looking into ways to invest in this frontier country for a couple of years now, it is now possible so what better than inserting a nice image of the country in this post:)

-I had been looking for this for a while, an ETF that is dedicated to the Vietnamese markets, VNM
-Zach writes about a stock we have traded in the past, Blue Nile (NILE)
-MDJ writes an update on his Smith Manoeuvre strategy
Four stocks with sustainable dividends by DividendTree
-Maybe not fun to do, but a very necessary exercise by FP about the true cost of vacations
-A new trade from MTJ, FCX options!
-Canadian Capitalist discusses the rumors of higher taxes
-A V-shaped recovery in the making?
Are financial ETF’s signaling a pullback?
-Very interesting article about those Nigerian online scammers🙂
What is hot and what’s not in solar stocks