Everyone I know must read Barron's Cover Story on Vanguard

Everyone I know who does not have an account or ETF with Vanguard needs to read this story from the cover of Barron's. If you do own Vanguard, you already know some of this. If you have money with anyone else, you NEED to know how your interests and your investment firm's interests line up (spoiler alert: they don't!). For decades I was a commodity indexer and did not compete with Vanguard. We met with them and they passed on commodities entirely. But I tried to run my firm on the same principles.
In my opinion, Vanguard is NOT playing catch up. The competition will do everything they can to upsell and eventually increase fees, while Vanguard, for a generation, has IMHO served the best interests of all long-term investors.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.
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Last Day of the Year-The Best Day to Buy

Most investors have heard of the "January effect" or "triple witching" day but there's little mention of the last day of the year, THE best day to buy!

Next Tuesday 12/31/2019 at 4 PM funds, stocks and everything else will close on the last day of the month/year/decade and a new "bogey", target or gauge for performance will be set for every investor. Money managers are laser focused on getting the highest one year, three year, five year, ten year and (for the young at heart) twenty year returns for their funds.

The 20 Year Indexes chart below shows the 20 year continuously compounded gains for the major investment indexes starting at 1000 on the close 20 years ago, 12/31/1999-the beginning of the new millennium. One would guess that the Russell 2000 index would be the way to go!

The One Year Indexes chart tells a different story.

The NASDAQ index was the top performer this year, while everything else, except commodities, were all competitive. Different time periods create different winners. IMHO the S&P 500 index is the ideal long term index for nearly all investors.

The continuously compounded rolling returns show this clearly:

Source: Yahoo Finance as of the close Friday, 12/27/2019

The moral of the story is that the index you buy doesn't matter all that much as long as you buy and hold for the long term. Take and pick and, excepting the BCOM commodity index, get your decent long-term gains!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Back to Basics: FBND versus BND

Fidelity has been touting the performance of their total bond fund, showing impressive charts in ads. As is my want, let's test these results and compare the Fidelity Total Bond Fund ETF (FBND) to the Vanguard Total Bond Fund ETF (BND).

First the fund companies' own published comparable results, in their own words:

Fidelity's FBND "Snapshot"

Quarter-End Average Annual Total Returns AS OF 09/30/2019

                NAV Return Market Return

1 Year +9.67%          +9.62%
3 Year +3.36%          +3.25%
5 Year     -- --
10 Year -- --
Life         +3.59%          +3.50%

Life as of NAV inception date: 10/06/2014   Life market returns are as of the first day the ETF traded on an exchange, which may occur a few days after the NAV inception date. Market returns are based on the closing price on the listed exchange at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times.
Gross Expense Ratio: 0.36%

Vanguard BND ETF "Profile"

Performance
Total Bond Market ETF
Average annual returns
as of 09/30/2019
Total Bond Market ETF

1-yr         3-yr         5-yr       10-yr        Since inception 04/03/2007
10.91% 4.16% 3.06% 3.52% 4.23%

Given Fidelity's own published results, one wonders why advertise them?

Using Yahoo daily historical data, let's do our own analysis.

Frankly, there is little difference between ETFs. Beginning with the FBND start date 10/9/2014 until 12/3/2019, using continuously compounded daily returns, $1000 in BND has grown to $1180.72 while FNBD has grown to $1191.54 over the same period.

Note, ALL these returns are highly period dependent. Given today's results, Fidelity would be happy to advertise the FBND ETF return.

Quick note on yield or distribution claims. They are not relevant. What is relevant to investors, including income investors, is ONLY the "Total Return". Total returns are the source of growth, dividends, "distributions" or withdrawals of any kind. Total return is the number that income investors and all investors must pay attention to.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Schwab TD Ameritrade Merger is a disaster for individual investors.

The almost inevitable demise of TD Ameritrade

(see https://www.washingtonpost.com/business/2019/11/25/charles-schwab-will-acquire-td-ameritrade-creating-wealth-management-goliath-with-trillion-assets/)

is IMHO the demise of a great trading brokerage firm that exists for the benefit of small investors.

TDAmeritrade, a merger of TD Waterhouse, one of the few GREAT brokerage firms and Ameritrade, at that time a dubious day trader at best, ended up as another GREAT brokerage firm that offered outstanding and low-cost service to individual customers. It was not biased to large accounts which almost ALL brokers now are.

Individual investors are left with Vanguard and a few firms such as T. Rowe Price that still DO give smaller accounts the service they require. IMO, almost every other major firm rips off the small investor.

The only hope left, and it is a slim one at that, is for the merger to be blocked on anti-trust grounds. If the market is defined as the space of individual investors... it COULD be blocked. But, with zero commissions, it is unlikely.

Final note: suppose it is blocked and TDAmeritrade is a stand alone company, the zero-commission business model won't work anyway to the chagrin of small investors.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Five Reasons NOT!

Forbes just published an infuriating article that looks written to save active managers from passive indexing: "5 Reasons You Should Own Stocks Instead of Mututal Funds (Or ETFs)"

When you click the link above, you WILL get the story, original Forbes' link here, but you will also see my comments pointing out the false statements and faulty logic of the author's premises and conclusions. Don't be fooled by false claims and colloquialisms, there is no basis for this story title or arguments made.

There IS a sophisticated argument against indexing which you can find here. And even this story misses much of the systemic risk indexing unavoidably presents. But for practical purposes we are nowhere near its limits and, today, does not apply to individual investors.

So go on and continue to buy and hold passive index funds and earn returns superior to actively managed funds for as long as they last in the foreseeable future.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

America vs the World

So many of us live in our own bubble, it's sometimes instructive to look outside and gain perspective. Yesterday's market rally may yet confirm many Americans' view that our markets are the best in the world, with all the suffering we are supposedly imposing on China and Presidential displeasure with European allies. Some also use our market to validate toxic politics and, more importantly, invalidate or mock the politics of our allies.

As is stated here many times, the politics are only a part of the economics of any nation, or, the world for that matter. So, as we look at recent price action, let's compare our returns with those of other nations.

Today's Wall Street Journal print version "Market Digest", clip below, shows year-to-date returns of major stock indexes worldwide. Of course, we can't buy stock indexes, we need tracking ETFs for that, but this is instructive in any case.

The US benchmark Standard & Poors 500 stock index closed Friday up 18.5% year-to-date. Without looking, does anyone want to guess which countries have closed HIGHER than the S&P? Here's the list culled from today's 10/12/19 Wall Street Journal Market Digest pictured above:

France CAC-40               +19.8%
Italy FTSE MIB              +21.0%
Sweden OMX Stkhlm    +18.8%
Switzerland Swiss Mkt   +18.8%
Germany DAX came in even at +18.5%

China, who is supposedly suffering under US Tariff threats is up 19.2%. And don't forget another dictatorship, Russia, up 24.7%.

Very different politics, very different countries, above, meet or beat America's benchmark. This should be instructive the next time we hear anyone who arrogantly and erroneously disparages our allies, dictatorships excepted. Admittedly, we could all do much better without belligerence and this tariff nonsense.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Commodity Market Lab for the Third Quarter 2019

The Third Quarter 2019 Commodity Market Lab_pdf is posted.

Commodity Outlook

The effects of toxic policy and erosion of international norms is finally taking a toll on trade, world economies and prosperity. Commodities, in spite of occasional price spikes, have lost most of their modest gains of the last two years. Instability at the top has lead to unstable markets worldwide. If this continues, we may yet re-learn the brutal lessons of tariffs and jingoism from the Twentieth Century.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Wasatch Ultra Growth Fund Review

When Barron's touts a mutual fund, in this case the Wasatch Ultra Growth Fund (symbol WAMCX), it's usually worth looking at. The hard part is beating the S&P 500 stock index without cherry picking or other bias. Well here goes my analysis:

Source: Yahoo Finance Dividend Adjusted Historical Data

The above is the dividend adjusted performance of WAMCX versus the same for the SPY or SPDR S&P 500 ETF. This is a better comparison than with any index because you can BUY both the fund and the ETF. You cannot buy an index.

Anyway, as I see it, this fund does well against the benchmark! The continuously compounded rolling returns show the same story in numbers:

Of the nine standard time periods, (no cherry picking) WAMCX beats in seven, a stellar performance. A quick look at the chart shows the drawdowns look similar as well. While the year-to-date performance appears lacking (who knew the day after Christmas would be the bear's bottom?) its right on the mark, neck and neck, with us "never sell" indexers.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

New Highs Are BACK!

New all-time closing highs came within reach this past week to the major stock indexes. Not all joined the party; mainly the Russell 2000 small stock index was left out.

NASDAQ=NASDAQ Composite Index

DJIA=Dow Jones Industrial Average

S&P 500=S&P 500 Index

RUT=Russell 2000 Index

Rolling returns are surprisingly mixed:

Continuously compounded annualized returns.

Source: Yahoo Finance historical data.

The one year numbers are weak, reflective of obvious instability. Two to 10 year returns reflect the recovery from the depths of the market recession. The 20 year comps take us to before the dot-com bust and the 30 year annualized rates of return are the familiar expected long-term rates for the stock market. 

After last Sep 30's peak and the scare from last Christmas, we can all let out a sigh of relief that the market has recovered and so have our Vanguard accounts. But what about all our other accounts? What if we SOLD at the bottoms, likely, or were never in the market to begin with, more likely... What to do on tomorrow's opening?

Since there IS no right answer, the only answer left is the only good answer the market ever had since creation of the first index fund in 1975*. Buy and hold an index fund. Scale in and only sell when you need the money, otherwise ignore the prices, the headlines, the hucksters, the annuity salesmen, the noise and all the advisors who seek to justify unnecessary commissions or fees or whatever, and stay the course owning the broad based indexes in this ever changing shape shifting American stock market.  

*A case can be made, a strong case, that "growth and income" mutual funds from the 1920s-1950s were, given their long-term diversified investment policies, in effect "index" funds. 

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Trading on Customer Ignorance

In my 20 years as a broker and 13 as a fund manager I never traded on client ignorance. Its off limits in my view. As a matter of fact, I see a broker's role as one who educates clients, especially with an unfamiliar or complex strategy, and THEN THEY can trade it. Either way we don't take advantage of their lack of knowledge.

Last Friday's Wall Street Journal had a misleading story on a major broker with client losses over a "low risk" "income" strategy. These clients traded iron condors. Iron condors, in my view, are not extremely bad or extremely good. When markets are flat, you can sell and keep options premiums-an income strategy when markets don't move much. IC's are sometimes called (like all option selling strategies) "picking up pennies in front of a steam roller". Yes, when markets MOVE, option sellers get rolled over. 

Source: The Tickertape, 3/25/19

But these clients didn't trade options at all. They actually invested in a fund created by the broker. This fund traded iron condors and was advertised as low risk income and took in billions of assets. Yep, interest rates are low and people want income. This fund charged huge 1.75% fees. Whatever else it did, it separated clients from their money.  

To put on an iron condor, you don't need a fund. You don't need to pay management fees. You need an options trading account AND you need to KNOW how to do it. It isn't hard but yes, you do need some education. Which takes us back to trading on ignorance. The best brokers focus on education, other brokers, not so much.

Because these people had no idea what the broker was doing and listened only to the sales pitch (income, low risk, neutral strategy, etc.) they trusted billions NEEDLESSLY to this fund. Needless for everyone except the broker. 

Its hard for a major pub like the WSJ to write a critical story about a major advertiser like a major broker so the focus of the story is the "complex investment strategy" and not the actions of the broker. In my view, the options markets are NOT to blame for these client losses.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

What's Going Down with Interest Rates?

Financial headlines are screaming about the "inverted yield curve". This is what it looks like:

Source: Federal Reserve Economic Data

The chart above shows the 10 year Treasury Note yield minus the 13-week Treasury Bill yield since 1962. All the blue peaks are periods when the 10 year rate was higher than the T-Bill rate. There are a handful of instances when the 10-year fell below the T-Bill including the last fifteen days as of this writing (Can you see it? It's a sliver on the far right bottom of this chart.)

Source: Federal Reserve Economic Data

According to today's data download from the Federal Reserve the "constant maturity Two-Year Treasury Note" has not been above the Ten-Year since 2007. 

Source: Federal Reserve Economic Data

What does this short rate "crossover" of the long rate really mean? In my view, it means nothing. It may coincide with stock market breaks but I don't see that they "cause" or forecast anything. Here are the Treasury rates with the S&P 500:

Source: Federal Reserve Economic Data and Yahoo Finance Data

The 1980 Volcker Crisis, the 2000 dot-com bust, the 2009 financial crisis all coincided with short-term rates rising above the long-term BUT they had NO lasting effect.

It may be that long-term investors have only been lucky for the last 200 years or so that US stock markets have been resilient and able to overcome wars, crises and even buffoons in government. Yes, we may be sorely tested today but the test of time is on the side of long term buyers.

Is Market Risk High?

Headlines are screaming the market has MORE risk than...this part is fuzzy... since the start of the bull market? the election? ever? Faced with the question do you believe your eyes or your theories, prudence may say the eyes have it!

Source: Yahoo Finance SPY historical data.

The above is a colorful and dense picture of the stock market, represented by the tradeable SPDR ETF price, AND its daily true range. True range is the day's high minus the low PLUS any gaps between trading days. This is a literal representation of how much and how fast the market can move over any one day. 

True range as a percentage of price is on blue left axis and the SPY ETF price on the orange right axis. To my eyes, volatility in the last year or so is little different, and maybe lower, than during the course of SPY's trade history. 

There are a number of days where the SPY range exceeded 6%, especially during the great recession, but recently the SPY has barely beat a 4% range!

Source: Yahoo Finance VIX historical data.

The much maligned VIX, a more complex measure of risk, on the long-term chart, above, reflects the same moderated levels of risk compared to past history.  Market risk, as my eyes see it, is little different and maybe lower than it has been for the last 20 years.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

America's Tariff War on the World

As world trade erodes on rising tariffs and rising threats, commodity prices take their toll. The jury is out on whether raw materials decline is enough to offset final price increases due to tariffs. The toll on world trade, though, is not in question. Markets may finally succumb to the long term duration of the American tariff war on the world.

Vista Commodity Market Lab 20190802 pdf is available here!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Beware Annuities

A lifetime annuity is where you pay a lump sum today and receive monthly payments for life.

Estimated amortization of a current lifetime annuity.

A recent quote from an A-rated insurance company for an age 65 $100K immediate annuity was $542.43 per month for life. This $542.43 is both a return of principal and interest. The insurance company's goal is to make exorbitant fees AND pay less over your lifetime than you pay in. The company keeps your money and makes payments for as long as you live. You COULD live much longer than the insurance company expects!

Of course, you could muck up your contract with complicated and costly riders including death benefits and/or continued payments to beneficiaries. These usually only confuse buyers and their main purpose is to increase fees. Buy and price each rider separately. So, no bundled riders!

How do we evaluate this quote?

One way is to look at a similarly rated corporate bond with the duration equal to your life expectancy. Using that measure, checking today's market, a 20-plus year $100K A-rated corporate bond pays about 4%, that is, $4000 a year or $333.33 a month. Bonds don't care what your age is, bond prices do not go up and down based on your age, annuities do!

$100K lifetime immediate annuity pays $542.43 monthly for life and zero at the term end.
$100K 20 year 4% bond pays $2000 every six months for 20 years plus $100K after 20 years.

Which deal is better?

Annuities have an illiquid secondary market. Bonds have an active secondary market.
Annuities are not quoted daily, bonds are.
Insurance company fees are opaque and huge. Ask agents what their total compensation is for selling annuities! Bond fees are much lower and transparent.
You lose your principal in an annuity. You keep your principal in a bond.
Annuities do not pass on to heirs upon death. Bonds pass on to your estate.
Annuity payments end upon death, Bond payments continue to maturity and accrue to your estate.

Note that lifetime annuity payments include interest plus a return of principal: $542.43 = $333.33 interest + $209.10 principal to start. With time, the interest portion will fall and principal will increase just as a mortgage would. If you live to your life expectancy, you may get your principal back.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Beware Zero-Fee ETFs-5 Reasons NOT to buy Zero-Fee Index Funds

1. Zero-fee ETFs require upselling.
2. Zero-fee ETFs are not sustainable.
3. Zero-fee ETFs will sell your information.
4. Zero-fee ETFs require expensive specialty skills.
5. Zero-fee ETFs are acts of desperation by the firms that sell them.

When markets decline, ads for annuities come out of the woodwork. When markets rise, as they have recently, a newer phenomenon of ads for "zero-fee" ETFs have sprung like weeds. Beware zero expense ratio ETFs and their mutual fund siblings!

Here's a recent Bloomberg story about Fidelity's "Fee War" with Vanguard.

So what gives here. What could possibly be wrong with major fund companies and brokerages (read Fidelity, Schwab, Blackrock and others) competing with Vanguard using"zero fees" or more precisely zero-expense ratios?*

Consider why this is happening. Vanguard, the father of equity index funds, is maybe the second largest fund manager in the world with over $ FIVE TRILLION in assets. This is "the house Bogle built" on plain vanilla broad based "passive" index funds (VFINX, VOO, VTI and the like).  Traditional active fund managers like Fidelity have seen their active managed assets evaporate in the face of indexing success.

Indexing is a highly specialized skill requiring knowledge and experience few have. The "tracking error" or difference between the index return and the index fund or index ETF return is everything for index investors. Be careful of what you actually are investing in.

It very well may be impossible for active management to beat indexing in any rising market. I suspect there's a proof for that. Active managers do outperform occasionally during market declines but this out-performance does not last, is inconsistent and unpredictable. 

*Don't confuse zero expense ratios with no-load funds. No-loads don't have sales charges. Zero-fee index funds don't compensate fund managers! Big difference!

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

The March of Indexing

Today's Wall St Journal story "Passive Investing Resumes Its March" is a cautionary tale for investors and investment firms alike.

Screenshot from Wall St. Journal.

Passive index funds outperform when markets rise to new highs (as they have done consistently for how many years? ah, maybe 200 or more). And active managers, may occasionally beat the indexes especially during bear markets.

The question remains, will markets continue their rise? Is passive investing an act of faith or is it based on more than just history? All one actually can know is the history.

There are counter-examples-a famous one of the investor in 1900 who spread his wealth among 10 different countries and lost everything except in the US and England.  Every other market, and currency for that matter, was destroyed due to war, inflation or depression.

There may be a conditional proof that indexing outperforms active management.  But, for most investors the decision is made.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Trading Day 619 Since Inauguration

Yesterday was the 619th trading day since Trump's 1/20/2017 Inauguration. The S&P500 is up 27%!
For the same period in Obama's first term, the S&P500 was up 52%.

Source: Yahoo Finance Historical data.

The above shows the Dow Jones Industrial Average and S&P500 stock index normalized performance (Inauguration Day = 1000) for the first 619 days since Trump's Inauguration and Obama's first Inauguration. Both have similar results.

Bragging is not polite but bragging rights are obvious in spite of the fact Presidents truly have limited effect on the stock market.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Commodity Market Lab for June 2019

The Commodity Market Lab pdf for June is posted.

With walkback on new tariffs, markets look to fundamentals of demand, growth and earnings for direction.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Another Long vs Synthetic Long

Options traders love to pitch "synthetic long" positions as replacement for plain old long stock positions.

Their major claim is that synthetics are more "efficient" than stocks, i.e. they require less capital.
Let's examine the validity of this claim. Let's use the S&P ETF SPY, last year's 12/31/2018 closing price and $7 commissions for our example.

Long:
Buy 100 SPY at 249.92 = $24,992 + $7 commission
Cost of long position: $24,999.

Synthetic Long:
Buy 1 28 June 2019 SPY 250 call at 15.11 = $1511 + $7=$1511
Sell 1 28 June 2019 SPY 250 put at 13.69 = -$1369-7=-$1362
Cost of synthetic long position: $149.00.

Wow. Quite a difference but don't be fooled.

Your broker will require much more than $149 for this options trade. And don't be fooled on the long position either, your broker will "generously" require only 30% or so of the cost to hold the long position. These are called "margin requirements" and this is how they add up:

Long Position Margin requirement: 30% of the stock price x number of shares or
$24,999 x .3 = $7499.70

Initial Synthetic Long Margin Requirement: 20% of the stock price x number of shares + put out-of the money amount + price of the put + price of the call or
100*249.92*.2 = 4998.40 + 0 + 1362 + 1511 = $7871.40

Fast forward to today and let's see what happened. As of this writing:

SPY= 294.23
28 June 2019 SPY 250 call = 44.36
28 June 2019 SPY 250 put = 0

Long gain: $4,424 short-term gain + $266.47 dividends = $4690.47
Synthetic Long gain: $2925 long call short-term gain + 1362 short put gain = $4,287
Difference: $403 to the long position.

We are not yet including your long stock margin loan. If you borrowed the full 70% ($17500) and the rate was 8%, the loan interest over the six month holding period would cost roughly $700. At full margin the synthetic would beat the long position by roughly $300.

This is only one example (you can try 100s and get similar results) but there is apparently very little difference between the two. One major difference is that options expire and stocks don't; another major difference is the risk of exercise of the short put-what a pain that becomes. Over the years, both differences add up. Also how valuable is efficiency anyway when there is little difference between the two.

The efficient claim IMHO is meh.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

What IS an annuity? Part 2

So what IS an annuity? Short answer: its where you pay a fee to give all your money to an insurance company and then you pay them fees to withdraw it.

There are actually three basic annuity contracts-variable, guaranteed and income:

• variable: you pay fees to buy a mutual fund and then pay fees to withdraw it;
• guaranteed: you pay fees to buy an uninsured CD and then pay fees to withdraw it;
• income: you pay fees to buy any of the above and pay fees to make regular withdrawals.

Either choice is a bad choice. They are all costly, illiquid and opaque.

• Costly because you can buy the above much cheaper with minimal fees;
• Illiquid because of fees, delays and restrictions in getting out.
• Opaque because of hidden/complex terms and lack of public pricing information.

Plain old life insurance is not included in the bad choice category. Life insurance, even whole life for some, is a wonderful and necessary product. Just as car, house and flood insurance can be. Beware policies that combine life insurance with investments and annuities. Buy your life insurance separately do not let it get bundled/confused with other products

To illustrate my point (illustrate is a favorite but vague term of annuity salesmen), lets look at one particular annuity example:

The simplest offer I could easily find today online is a "single premium-deferred annuity" from one of the rare companies that publicly posts their rates. Their 10 and 20 year rates are 4.30 and 4.35%.

Its identical to a 10 or 20 year CD but its NOT a CD. Its an insurance contract and insurance companies are typically NOT FDIC insured. Firstly, 10 or 20 year certificates of deposit barely exist. Secondly, today's U.S. Treasury 10 or 20 year bonds are yielding less than 3%! 

So they are selling you a 10 or 20 year CD with a "guaranteed" yield of 4.30% or 4.35%. This "guarantee" is backed by the full faith and credit of the INSURANCE COMPANY. But what does the company do with your money other than deduct fees?

Sadly, this company, headquartered in South Carolina, is a subsidiary of a subsidiary of a subsidiary etc. etc. at least according to Bloomberg. The ultimate parent of this particular insurer is a bank in Greece with low-B credit ratings. The company's stated insurance industry AM Best rating is B++.

But that does not tell us what the insurance company does with formerly your money and now its money. Here's a quote from the company's public financial summary (click on the About tab in the link):

"As of December 2018, the portfolio is primarily invested in bonds and has an overall credit quality of 1 or 2 (investment grade), using the National Association of Insurance Commissioners (“NAIC”) financial rating designations, with an average net yield of 5.20%."

Ah yes, they invest in a high yield corporate bond portfolio yielding (as of this date) 5.2%. How nice of them to offer policy holders a return of 4.3 or 4.35%. Frankly, if you really wanted this kind of portfolio, you could buy a great high yield long term bond fund-a Pimco High Yield bond fund today yielding 5.38%* comes to mind.

Let's not pick on this one company (they DO show their rates publicly) it may be one of the better ones out there.

*Individual bonds and bond portfolios,"guarantee their rates", bond fund rates change with prices. Buying individual bonds may be better than buying bond funds.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Market's Up Despite Last Week's Bearish Headlines

The market's way up again as this 1 month DJIA Yahoo screenshot shows.

I don't really want to pick on Barron's because it is one of the best pubs out there for investors, large and small, but they are posting some very questionable advice.

Take the following headline from last Saturday's issue: The Best ETFs for a Choppy Market

Without picking on the usually excellent writer, the entire premise of the story is the fault. This is a "With all this uncertainty, investors who want to take some risk off the table and become a bit more defensive should ..." kind of article.  Why take risk "off the table"?

A critical reader will ask: When is the market NOT choppy? There is always uncertainty and that's the problem.  Anyway how do we know we are taking risk off the table and what are we giving up when we do?

The story then quotes a portfolio manager who says "Investors should aim for “minimum volatility, greater diversification and keeping an eye on asset allocation,’’ to reduce risk. I am not sure this is even possible.  How do you know any certain stock, fund or ETF will reduce risk? Buy and hold indexers know this is impossible.

What we do know is whenever markets fall they historically recover. This is despite Presidents, economies, wars, recessions and depression-such is the nature of our shape-shifting stock market for two centuries. What DOES matter to investors is their need for funds and their ability to wait out any downturns.

Sadly, money managers can only beat indexes when the indexes decline. But these declines don't last and investors who take manager advice usually lose out in the same way that managers underperform.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

What IS an Annuity?

Apologies to the Dowager Countess for my heading in response to index-linked annuity advertisements that creep up like weeds whenever the stock market falls.

I believe these ads mislead and are harmful to your wealth. The above is a rough picture of the investment portion of a one year index-linked annuity contract. These expensive and opaque insurance contracts generally offer, for a 1, 3 or 6 year term, a certain amount of "protection" or "shield" from market declines along with a capped share of the gain if the market rises.

This "insurance" strategy can easily be created with exchange traded index options with total transparency, total liquidity, at extremely low cost with NO withdrawal fees and a far smaller margin deposit than any insurance purchase.

The SPY, S&P 500 ETF, chart above shows the profits and loss from a "split strike with short put" options strategy.  It's very much like the "split strike" strategy touted by Bernie Madoff but without the upside.  Whether Madoff is a tip off or not, this is the terrible strategy:

As of today's closing prices, with SPY at 290, (1000 shares = $290,000),
Buy 10 SPY June 2020 (1-year) 290 (at-the-money) Puts for roughly $18.30 or $18,300
Sell 10 SPY June 2020 260 (10% out-of-the-money) Puts for $9.50 or $9,500
Sell 10 SPY June 2020 320 (10% in-the-money) Puts for $35.10 or $35,100

These trades combined will credit your options account with $26,300.
Total commissions at my broker would be roughly $20. No withdrawal fees, no hassle to get in or get out!

This $26K credit is the "protection" against the loss of your real portfolio, which in this example, is the $290,000 invested in the SPY.  This example is slightly less than 10% but you can increase your credit to by adjusting the strike prices of your options.

Why is this strategy so bad? Look at the chart: your losses can be maximized and your gains are limited, the exact opposite what any investor wants. If you really do want protection, forget selling puts and just buy the at-the-money put. This is an insurance policy that costs 6.3% of your portfolio and gives you total protection from the downside with full participation (except for the insurance premium) if the SPY rises.

The chart above is so bad that option traders don't even sell this strategy. You would be hard pressed to find the above options payoff chart online.  Its so bad that only annuity salesmen would sell it.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Commodity Market Lab for May 2019

The Commodity Market Lab pdf for May is posted.

Not much to report this month except tariffs are now going from threat to reality and commodities are reaping the consequences.

Checking Out ARKK

Some smart people recommend a fairly recent and interesting actively managed ETF, ARK Innovation ETF.

Source: Yahoo Finance adjusted close for symbols ARKK, SPY and QQQ.

ARKK began trading in October 2014 and has a currently reported $1.6B in assets. ARK's investment objective is to actively invest in what they call "disruptive innovation". Check out this link to see how the fund describes itself. We will check out the fund performance to see how symbol ARKK stands against tradeable index ETFs, SPY and QQQ!

To start, the chart above looks pretty good but something happened in 2017 thru mid-2018. Let's look at the annual and rolling returns as of today's 5/29/2019 close:

Prior to 2017 and after 2018, ARKK looks like a decent actively managed ETF.  The spectacular gains occurred in the 2017-2018 period. Whether these gains can be replicated in future years is the question. Recent volatility is hurting ARKK much more than even the Nasdaq (as represented in the QQQs). The following table highlights this risk.

All of the above are based on continuously compounded rates of return. 

Unlike Mueller, this blog does make judgement calls and the call on ARKK is its an excellent high-risk performer (3 or 4 times the risk of the SPY and Qs). While slow out of the gate, it made spectacular gains mid-stride, with recent performance in line with the benchmarks.

I think its a great choice for high-risk non-index active investors. An index it is not.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

The Tariff Tantrim

As I write this post, the temperature of tariff threats rise (as well as other threats) and the Dow Jones Industrial Average falls! The Dow is having another Tariff Tantrum!

Source: Yahoo Finance, yahoo.com.

The Dow as of approximately 3 PM this afternoon is down 378 points or 1.72% at 25398, nearly 500 points below last Friday's near 25900 close. Likewise, broader indexes are all down in lockstep: The S&P 500 down 1.7%, NASDAQ down 2.05%, the Russell 2000 down 2.28% and the Bloomberg Commodity Index is off a mere 1.25%!

Despite the strum and drang of today's headlines, this again may be ANOTHER chance to BUY THE DIP! The year-to-date performance, in my view, paints a much prettier picture.

S&P500 = S&P 500 Stock Index

DJIA=Dow Jones Industrial Average

NASDQ=NASDAQ Composite Index

RU2000=Russell 2000 Index

BCOM=Bloomberg Commodity Index

Source: Yahoo Finance historical "adjusted close".

Even with this most recent down move, about -5% month-to-date, indexes are still up +8% to +13% for the year.  The exception being the commodity index which is only +1.5% up on the year. 

It's still too early, if ever, to give up on the market!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Commodity Time Machine

As stated many times before here and everywhere, commodity prices are low. Some are near their all-time lows as recorded by the major commodity indexes. Below are key Bloomberg Commodity Sub-Indexes since their 1991 inception.

Source: Bloomberg.com.

Energy and Agriculture are both at their all-time lows! Commodities are trading BELOW their 1991 levels!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.