Stock Market Insurance

The cost of 1 year stock insurance since 2005 is presented below:

SPY = S&P 500 ETF 

Put Cost as Percentage of SPY

Source: T. D. Ameritrade ThinkBack platform.

Above are the year-end closing prices of SPY and cost of the closest 1 year at-the-money put*, as a percentage of SPY, since SPY options started trading in 2005. Note that the SPY Return, our proxy for a stock market portfolio, averaged 9% with the largest drawdown of 38% in 2008. The "married put" insured portfolio, Return with Put, averaged 4% and reduced the portfolio loss by 30% in 2008. The married puts paid off in the down year. 

All told, just like real insurance, premiums (put prices) vary each year and its up to the buyer to judge their worth. In my view, option sellers are very shrewd and usually price put option insurance so its NOT worth buying.

*Two examples from the above table: 

Up year: On 12/31/2018 SPY closed at $249.92. The at-the-money put closest to covering the coming year was the 12/20/2019 250 put which closed at $18.185 or (18.105/249.92 =) 7.3%. On 12/31/2019 SPY closed at $321.86 for a return of 28.8%. The return less the cost of the put was 21.5%. Since SPY closed above the $250 strike price, the put expired worthless. 

Down year: On 12/31/2007 SPY closed at $146.21. The at-the-money put closest to covering the coming year was the 12/31/2008 $146 put which closed at $11.07 or (11.07/146.21 =) 8.0%. On 12/31/2008 SPY closed at $90.24 for a loss of -38.3%. The put stopped the loss at the $146 strike price so the net loss was only -8.1% (=11.70 cost of put +.21 difference between stock and strike = 11.91/146.21.).

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.

COVID Hoax Delusions

With more than 100,000 patients filling hospital beds and newly reported confirmed cases exceeding 200,000 a day-all-time records (see Wall St. Journal), the many posts implying COVID is a hoax will NOT let up.

Sadly, delusional politics is par for the course, delusional money managers are not.

GDP Revisited

Despite recent political boasting, the St. Louis Federal Reserve GDP stats provide, for some, a sobering view of economic performance under two Presidents-PRE COVID!. 

"MORE INDEX!" - Stocks versus Options

The COVID break is over! We have a full recovery plus some and NOW what do we do?. Obviously, just buy and hold MORE INDEX. Or to paraphrase: "More Cowbell!" 

In my view, once the ECONOMY recovers, which it WILL, the market will roar and maybe return to Obama level gains. (Note Obama markets doubled in the first term and rose 50% in the second also GDP growth outpaced the pre-COVID Trump era).

Given this bullish opinion, this post will compare the returns from buying the stock to the equivalent buying of TWO "at-the-money" call options. 

A valid test is time period neutral, no cherry picking. Year-to-date 2020, with an extreme decline and extreme recovery plus some, is a perfect stress test for nearly every scenario. A valid test would also use the largest most liquid tradeable index and options available, the S&P500 ETF SPYs!

In options speak, one "at the money" (atm) call option is equal to 50 shares of the underlying stock. Thus 2 atm SPY calls = 100 SPY. See a more complete discussion of options here.

The closing price of SPY on the last day of 2019 was $321.86. The "full year", atm call on that date was the 18 December 2020 expiration, $322 strike, call option. The comparison of buying 100 SPY versus buying 2 SPY atm calls is shown below:

Quotes Source: Thinkorwim Thinkback

The options cost roughly $4,000, a fraction of  the more than $30,000 needed to control 100 shares of SPY.  Likewise the return on investment is huge for the options, while the dollar gains are roughly the same. 

A small caveat is that while you must pay for the options up front in full; the stock position may require one half to a third of total cost depending upon your broker's margin requirements. Thus the return on investment, ROI, would be much larger for the stock position but still far below that of the options. 

A large caveat is that options expire, stocks don't! If the stock is not up enough, you will lose ALL or some of your atm option investment. When your time runs out, your option expires. You stock doesn't expire. 

A final caveat, this is just one data point, just one year. While the method is valid, there is no guarantee that any given year will produce the same results. Consider 2017 for a counter example. 

In conclusion, options may be one of the best ways to capture stock market gains in rising markets.

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 COVID Market Break is Over!

Last week, Monday November 16, 2020 at 29950.44 , without fanfare, the Dow Jones Industrial Average fully recovered from the COVID stock market low on 3/23/2020 at 18591.03.

The Dow took 238 days to recover and was the last major stock index to return to its pre pandemic high. Here are the numbers:

These are remarkable numbers. As shown in my 3/12/2020 post in the middle of the COVID market break, Time To Recovery, the historical average for all bear markets since 1900 is 5.6 YEARS peak to peak!  

The difference may be clear: pandemics are limited events. With vaccines on the way, the markets anticipate a full recovery from COVID. With all four major indexes fully recovered, at some point we will start a new cycle, a new break and a new time to recover. 

Sadly, as perhaps indicated by the modest year-to-date returns, the real economy for most people IS NOT RECOVERED. 10 MM unemployed, GDP a fraction of its former self and ever rising income equality may only prove that stock markets are just one measure, a limited measure, of the national welfare.  

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.

Full Recovery?

Wednesday's 6/3/2020 $236.69 NASDAQ100 QQQ adjusted closing price marks a FULL RECOVERY from the $168.94 multi-year low of March 16th and exceeding the prior all-time high of $236.48 on February 19th!

QQQ = Invesco QQQ Trust

SPY = SPDR S&P 500 ETF Trust

IWM = iShares Russell 2000 ETF

Source data: Yahoo Finance adjusted closing prices

It took 105 days for the Nasdaq to recover its all time high. Note the S&P 500 ETF SPY is hot on the heels of QQQs recovery. The Russell 2000 represented by the IWM ETF still has a way to go.

Based on yesterday's closes here is where the major indexes and commodities I follow stand:

DJP = iPath Bloomberg Commodity Index ETN

GCZ20 = December 2020 Gold Futures Contract

CLZ20 = December 2020 Crude Oil Futures Contract

HGZ20 = December 2020 High Grade Copper Futures Contract

Commodity Source data: barchart.com, DJP source date: Yahoo Finance

Note the QQQs are UP 11% year-to-date! The SPY is -2% ytd and -7% from its all time high! Crude Oil is the major laggard, still down about 40% for the year and from its all time high. Copper is well off its high but only -11% year-to-date.  Gold has been the star performer for 2020 but in the last few days has been eclipsed by the QQQ.

Outlook

All these numbers are backward looking but then again, history is all we have and all we have to go on. The long term effects of pandemic and social unrest have yet to be felt. But, so far, this market break is well within historic limits. Note also there may be a major disconnect between the economy and the stock market. I feel confident, with time, one will catch with the other.

Note, right or wrong I use exchange traded index funds to represent the actual indexes/asset classes. We cannot buy indexes but we can buy the etfs. Also, the major broad based etfs very closely match their underlying indexes. Of course, there is no assurance this will continue in the future. This year has been an excellent stress test and, in my opinion, the etfs have passed with flying colors!

As for commodities, the DJP decently represents the pre-eminent Bloomberg Commodity Index and, in my opinion, the December futures are the best possible representative for long term commodity prices. 

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.

© Vista Mkt Research All rights reserved. 

Copper FMC and SPY

Who knew an industrial metal commodity, copper, a mining stock, FMC Corp. and the SPY ETF all have similar returns? I didn't but it shouldn't surprise me. Here's the VAMI* chart:

FMC=FMC Corp. Common Stock

SPY=S&P 500 SPDR ETF

Dec 2020 Copper Futures

Source: Barchart.com

What's interesting about this chart is that it isn't. While ALL are under stress, copper futures, the  FMC mining company and the S&P all went down in March but they all came back, near lockstep, together. They each had differing yet some similar headwinds:

• copper should have been dragged down by the collapsing commodity complex;
• FMC should be facing the demand destruction of the long ailing mining complex;
• the S&P is, well, the S&P, holding up despite dismal economics: 30MM unemployed, earnings collapse, looming bankruptcies and double digit declines in GDP!

Another way to look at this is the long feared correlation of ONE! When, as the theory goes, markets face shock and awe, crisis and fear, EVERYTHING falls together-the dreaded correlation of ONE.  That everything RISES together takes the idea a step further. Shock & awe, crisis and fear, may not be letting up, not YET giving way to the supply and demand characteristics of individual companies, individual commodities and individual markets. 

Going long the Dec 2020 Copper futures or FMC stock, even, may be another way to trade any expected recovery in the stock market and the economy. 

*VAMI=Value added market (or monthly) index, a measure of asset returns for a given period. 

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.

Active versus Passive

The COVID-19 stock market crash and subsequent ups and downs has presented a near perfect test of the ability (or inability) of managers to beat the S&P 500 index.

Vanguard S&P 500 Mutual Fund (black) versus 18 Largest Actively Managed Mutual Funds Year to date 4/8/2020.

Source: Yahoo Finance

The above chart shows how well the top active managers (in colors) have done in this year's roller coaster market along with the Vanguard S&P 500 index fund (in black) A glance shows the passive index fund in the middle of the pack. Long-term indexers just have to take it and suffer losses as they happen. But we get to take ALL the gains as they happen too! 

Funds managed by expert professionals claim to have the ability to avoid losses-they can get out-while not missing market recoveries-they can get back in. This is called active management or market timing. 

Methodology

The methodology here bears mentioning. I prefer to use ETFs, but ETFs are mostly passive index tracking funds. While ETF indexes vary, the point here is not to compare indexes to indexes but rather manager returns to the S&P 500 index. For that we needed a good sample and below are the Vanguard index fund plus the 18 largest actively managed mutual funds, in size order of assets under management.

VERY IMPORTANT NOTE: The top ranked fund, Fidelity Growth, is CLOSED to new investors. You can't buy it. Hmmm, makes you wonder if it really should be in this list at all!

Below is a table showing how the numbers add up:

Source: Yahoo Finance

ActiveShare

Another point to bear is the "ActiveShare" ranking looking for indexers in "disguise". Activeshare ranks funds by the percent that the fund is actively managed. 100 = no index stocks, 0 = all index stocks. Note: Vanguard has a 7 ranking, appropriate for an index fund. The average ranking of manager funds is 57, that is, they are 57% active and the rest is index.  

Returns

Here's where the pedal hits the metal:

For 10 year returns, there were 8 winners that beat the index out of a total of 18 actively managed funds. Top name: Fidelity Growth.

For the 5 year period, there were 7 of 18 winners. Top name: Fidelity Growth

Year to date 4/8/2020 there were 8 of18 winners, too. Top name: Fidelity Growth

Note I also looked at 2020's highs and lows, 6 funds beat the index at the high and 10 funds beat the index at the low. Top name at market high and low was Harbor Capital, but Fidelity was right on its heels. 

Conclusion

In this limited study, the largest actively managed funds were 50-50 or so better than the passive fund. As for persistence or the ability to outperform over varied time periods, 5 funds, less than one third, (all in blue on the table) were able to beat the index during all the periods tested. Only 4 can be bought. 

Funds that outperformed had middling activeshares. High activeshares did not perform. Note the largest actively managed fund, American Washington Mutual did not beat. Kudos to Harbor Capital. I'll stick with the index.

Sorry to mention this but there is another very important asterisk to these mutual fund returns, in some cases NO INVESTOR could possibly earn these long-term gains. That's because some funds are COMBINATIONS of one or more prior funds that were rolled up into this. A more complete study of this issue is warranted- it invalidates ANY long term return claims. This is not true for the Vanguard S&P 500 Index Fund -VFINX. It has no survivor issues. 

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.

Q1 2020 Commodity Market Lab

The Q1 2020 Commodity Market Lab pdf is posted.

The New York Times has a plaintive story entitled

I Became a Disciplined Investor Over 40 Years. The Virus Broke Me in 40 Days.

Today's virus stock-market crash IMHO is an opportunity of a lifetime, and a special one at that, for long-term investors to not just survive the crash but significantly increase their net worth BECAUSE of this crash! Let's first look at the writer of this story. I believe he has made a few critical mistakes.

Markets Right Now Update

The market closed Friday down 915 points! So, after this week's rally, where are we? The chart below shows the returns for the major asset classes since the start of the year. As always, rather than show the indexes, which you cannot buy, I prefer to show the index ETFs*, which can be bought by any investor!

Source: Yahoo Finance*

BND=Vanguard Total Bond Fund

QQQ=Invesco QQQ Trust

SPY=SPDR S&P 500 ETF

IWM=iShares Russell 2000 Index

The chart above shows where we are as of yesterday's close. Note the charts above AND below show the change in value of $1000 invested at the beginning of the year. 

Bonds are flat, stocks are down, small stocks (represented by the Russell 2000 ETF IWM) down the most and for good measure, I am adding, below, returns of two commodities important to many people: gold and crude oil.

Source: Barchart.com

GCZ=December 2020 Gold

CLZ=December 2020 Crude Oil

Here's what the numbers look like:

*Note "drawdowns" measure the decline from the market's highs. Maximum drawdown measures the percent drop from high to low, Current drawdown measures the percent decline from high to today's price. 

The IWM had the largest stock market drawdown, -41%, versus the SPY's -34%. Bonds performed well providing the downside protection investors expect. QQQ, surprisingly, had a little LESS risk than the S&P. 

What's interesting to me is that stocks recovered nearly a third of their losses between the lows and yesterday. Note bonds and gold are barely down while crude oil, in the throes of a price war, is down a dismal -43%! 

*One advantage of using Yahoo Finance data is ANYONE, using symbols or search, can download daily historical data for free and see for themselves. I use "Adjusted close" data to include the value of distributions, if any. Finally, I have a problem using proprietary or obscure data. Note any data errors WILL be reflected when the data is used. Barchart.com, in my opinion, is the best source for futures prices that average investors can get. 

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.

TWENTY YEAR LOWS

I once had a client who's commodity trading strategy was buy only ten and twenty year lows! It was a reckless touch of genius requiring generational patience. It worked with commodities because commodities generally don't go bankrupt.*

Nearby futures contract price per barrel. Source: Barchart.com

As I write, the active month May WTI Crude Oil futures contract is trading at $25.74 a barrel, down $20+ this month alone. The 10 year low WAS $26.05 made February 2016. The 20 year low for nearby crude oil is $17.12 from November 2001. Can crude oil fall another 33% to match its 20 year low?

Crude oil is not alone. It is joined by nine other commodities or commodity sectors of the 40 measured by the Bloomberg Commodity Index. These are: Crude Oil, Agriculture, Corn, Energy, Grains, Petroleum, Softs and Sugar. Four more components are at 10 year lows! Ten and twenty year lows tend to be rare but highly correlated. Commods like to rise and fall together.

Crude oil looks great at its $20 support level. But then again it took over ten years to rise from it.

*While commodities don't go bankrupt, they do become "delisted". Once delisted, owners of futures contracts are left to the whiles and enormous expenses of the physical 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.

Time To Recovery: The Only Metric that Matters!

Long term investors need to know how long is long?  All we know is history, so lets look at it!

Since 1900 the DJIA has had 12 major market breaks (or "bear" markets when over 20%). Every researcher judges breaks differently. The breaks here begin with the 1903 so-called "rich man's panic", the 1907 break "saved" by J. P. Morgan, WWI 1916 break, 1920 postwar break and 1929, of course. 

Then 1961s steel strike, the 1966 "Go Go" break, 1974 Nixon resignation, 1987 program trading, the 2001 "dot com/911" bust, the 2009 financial crisis and our very own 30% coronavirus break which we are in the middle of right now!

Sources: DJIA closing price data from Macrotrends downloaded years ago and Yahoo Finance. 

Market Breaks since 1900: 12
Average Size of Break: 58%
Average Duration of Break: 1.4 years
Average Time to Recovery (peak to peak): 5.6 years

Some Notable Breaks:

Worst Break:
9/3/1929: 381.17 to 7/8/1932: 41.22  down 89%
Duration of Break 2.8 years
Recovery Date: 11/23/1954: 382.74
Time To Recovery: 25.2 years

Best Break over 20% (definition of a bear market)
2/9/1966: 995.15 to 10/7/1966: 744.32 down 29%
Duration of Break: 7 months
Recovery Date: 11/13/1972: 997.07
Time to Recovery: 6.8 years

Dot Com Bust:
1/14/2000: 11723.00 to 9/21/2001: 8235.81 down 35%
Duration of Break: 1.7 years
Recovery Date: 10/3/2006 11727.34
Time to Recovery: 6.7 years

Financial Crisis:
10/9/2007: 14164.53 to 3/9/2009: 6547.05 down 77%
Duration of Break: 1.4 years
Recovery Date: 3/5/2013 14253.77
Time to Recovery: 5.4 years

The shortest time to recovery was 8 months during the 1996 7% market break.

Based on the average market break since 1900 above, what does it mean for today? Let's see. ESTIMATES IN RED.

Coronavirus Break:
2/12/2020: 29551.42 to 9/12/2021: 17139.82  down 40%
Duration of Break: 1.2 years
Recovery Date: 9/12/2025
Time to Recovery (peak to peak): 5.6 years

A case may be made that a pandemic may not last as long as a financial panic. If so, all to the good, otherwise based on 120 years of data, we may have a while before this market recovers.

3/31/20-this post was revised to show peak to peak Time to Recovery versus low to peak. We don't know if we made our lows but we DO know the high.

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 HARD Part of STAYING the Course

RIGHT NOW WE ARE IN THE MIDDLE OF IT!

Source: Yahoo Finance

The DJIA closed down 2,014 points yesterday., It was up 800 earlier today, is giving up its gains and is almost unchanged as I write! Yesterday's 23,851.02 close takes us back to the Dow in Jan 2019! The market bottomed the day after Christmas 2018 hitting a two year low of 21,712.53!  That's still 2000+ points away from today's 24000 or so price level.

The stock market is one of the few machines that can actually go backwards in time. If you missed the rally of 2019, here you have another bite at the apple. BUT, no one knows if there is a better bite around the corner! What we do know is that most of us do not buy on major declines but here is your chance to fix that and BUY STOCK INDEX ETFS NOW!

And if you are already fully invested, its HARD to stay the course and not sell. It may even be a measure of character.

Imagine that the Dow is a stock whose high was 30 and its now 24. Its not all that extraordinary a move and panic may not be warranted. So long-term investors who missed the first move have a second chance. How LOW can it go? Good question and there is no answer except we can look at history and make guesses. A tremendous support level appears to me to be the 18,000 level before the 2016 election. That's a good 6000 points away and would completely evaporate the entire Trump rally.

The stock market never came close to wiping out the rally under Obama. Even the 2011 decline ended up as a blip on a long term 300% rise over 8 years. Perhaps the economic threats of closed borders, tariffs and Trump jingoism, not to mention the coronavirus, are taking its toll.

PS: the market rose 600 points since I started writing this post, DON'T MISS THIS CHANCE TO BUY!

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.

Why are Inflation, Unemployment, Interest Rates and GDP Growth Rates So Low? Japanification!

A quick look at The Economist or any authoritative source will reveal a little known reality:

Regardless of policy, politics or ideology, inflation, unemployment and GDP growth rates are historically and universally LOW!

Is this true? And, how can this be? From the most recent economic data section (as of this post) from 2/2/2020's Economist: 

GDP is 2.1% in the US, 0.5% in Germany, and 1.3% in Norway.
Inflation is 2.3% in the US, 1.3% in the Euro area and 1.9% in Peru.
Unemployment is 3.5% in the US, 3.1% in Germany and 3.1.% in Mexico!

Not every number but MOST of these numbers are quite low. The US, Germany, Norway, Peru and Mexico all have quite different politics but not so different results. Unemployment, especially, is low in the developed countries from South Korea to Denmark to the Czech Republic! What in the world is going on?

The answer may be found in Japan! Japan has the one of the lowest economic rates in the world and has had them for nearly two decades. Waves of Japanification-the demographics of aging societies-are sweeping across the developed world. As billions of people retire or retreat from active employment, they are being replaced by fewer and fewer young people-the result from years of low birthrates.

The new economies do not have the population growth, the economic growth or the financial growth of the post-war generations. Even the "robust" innovators, the DISRUPTORS-they only REPLACE existing structures rather than add to the national product. Amazon grows while brick and mortar shrink. Fewer Teslas replace many conventional vehicles. This negative pressure, pushing harder every year, will depress economies until the great generational transition plays out. Its taken a toll on Japan for two generations, since the 1980s, and still isn't done. It may take decades to play out in the West.

So beware those who tout their policies for today's unique low unemployment, low inflation and low interest rates. We may have decades to go before the developed world returns to the glory days of the latter 20th 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.

Now and Then-the Economy Under Two Presidents

It is wise to be wary of political claims of economic superiority, especially when economic performance is, in fact, the collective performance of ALL Americans, not just one at the top. 

Under Trump, as of the end of his second calendar year in office, 2019:

4Q2019 GDP was just reported up 2.1%.
12/2019 unemployment rate was 3.5%.
The gain in the S&P 500 from inauguration day to 12/31/2019 was 35%.

For the same period under Obama, the end of 2011:
4Q2011 GDP was up 5.4%.
12/2011 unemployment was 5.4%.
The gain in the S&P 500 from inauguration day to 12/31/2011 was 45%.

All Presidents have mixed economic results. No President deserves sole credit for economic results.

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.

Year-End 2019 Commodity Market Lab

The Year-End 2019 Commodity Market Lab is posted.

A word on bias

Those who follow my posts see that I am biased toward broad-based stock index funds and against actively managed funds, or buying individual stocks, for that matter. So that begs the questions, exactly which index, which fund and which wrapper (mutual fund or ETF)?

WHY We Buy Stocks

This post attempts to answer WHY we buy the Standard and Poors 500 stock index.
Consider the following Holding Period Returns:

Using monthly closes, starting 12/31/69 or almost 50 years ago to the day, these are the maximum (blue), minimum (red) and average (green) returns for the standard long-term holding periods.  For example there were almost 600 1 year periods since 1970. The largest 1 year decline was near -60%, the highest one year gain was over +40%. That answers how much we can lose in any one year!

Holding Return Table:

Despite the horrendous loss of Feb 2009, note that 75% of ALL 1 year holding periods were GAINS!

The three year periods have a much smaller high to low range. With over 500 3 year periods since the start date, annualized returns ranged from +26% to -19%. Note there were NO LOSING 15 year holding periods!  The expected/average annual return across all periods shown is over 7%.

That's why we buy and hold stocks for the long term.

Another reason we buy S&P 500 funds is that they beat over 70% of actively managed funds nearly every year! For this I send you to SPIVA or S&P Indices Indexology webpage, which does a fantastic job of tracking S&P 500 relative performance.

Final note: Yes, the Nasdaq stock index does consistently beat the S&P500 except when it doesn't. The added gains from holding the NASDAQ do not, IMHO, outweigh the added risk, that is, the larger losses or drawdowns experienced by the NASDAQ. So yes, there are gains to be had but all index gains are at the price of suffering tough drawdowns. S&P 500's Feb 2009's drawdown was hard to live through. It was worse for the Nasdaq.

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.

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.
hashtag

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.