Monday, December 15, 2014

The 2014 Global Rejects for 2015

Based on the positive feedback from the imaginary "2013 Global Rejects Portfolio: Only For People Who Hate Money" (posted here), I have decided to do a quick imaginary "2014 Global Rejects Portfolio: Money To Burn"

There is a challenge however: going solely off YTD and loss from 52-week high would present a gigantic bet on commodities/USD weakness, be it producers or whole countries. The 2013 rejects were a more diversified bunch. So I am still sticking with Rejects (down 5% to 52% down from the 52-week high as of Friday Dec 12 2014) but not everything is from the very bottom. I am also going with 5% picks only.

Here it is by broad category:

Commodity-driven industry sector ETFs (7): FCG nat gas equities, OIH oil services, GDX gold miners, SLX steel producers, SIL silver miners, KOL coal miners, AMLP MLPs

Weak US sector ETFs (3): SOCL social media, ITB homebuilders, KBE regional banks

International ETFs (3): ELD EM local debt, EMCB EM corporate debt, IPS international consumer staples

US fixed income ETF (1): JNK high yield

Country ETFs (6): RXSJ Russia small caps, GREK Greece, BRF Brazil small caps, EWI Italy, EWP Spain, ARGT Argentina

(The imaginary nemesis, call it the "2014 Global All Stars: The Mo Bro" could be something like 10% each: TLT LT Treasury, PFF US Preferreds, XLU US Utilities, VNQ US REITs, LQD US IG Corporates, XLY US Discretionary, IBB Biotechs, EPHE Philippines, ENZL New Zealand, EPI India)


Saturday, December 13, 2014

The Imaginary "Barbarian Capital All-Star Global Rejects 2013" Portfolio

About a year ago, bond manager, herbal tea enthusiast*, Boston** sports fanatic and occasional blogger @DavidSchawel emailed me (and several other people) to crowdsource portfolio ideas for a blog post. The blog post never came but I had already saved the portfolio that I submitted: The Barbarian Capital All-Star Global Rejects 2013: ONLY for people who hate money.

The simplistic portfolio approach was to buy the worst performing global assets in 2013 via ETFs available in the US. If you remember, interest rates were rising in the US so US fixed income and real estate had not done well. Internationally, we had weakness in several markets, some commodity driven. We also had weakness in precious metals and coal.

So the portfolio was 15% each GDX gold miners, KOL global coal, TLT long US bonds, IYR US Real Estate, and 5% each ECH Chile, BRF Brazil Small Cap, IDX Indonesia, TUR Turkey, EPI India, THD Thailand, REM Mortgage REITs and PFF US Preferred Stocks.

How did it do? Not bad actually: up a little over 8% after 365 days even with train wrecks likea Coal and Brazil. Most of the performance was driven by declining US rates (helped TLT IYR REM and PFF), as well as a breakout in India. An equally weighted portfolio would have done a little better, at 9.8%.

What can you learn from it? Nothing: it shows momentum, mean-reversion and luck. May be a case for diversification.

Screenshot of the portfolio and the original email below.

*,**- Schawel actually likes coffee and Chicago sports

Thursday, May 8, 2014

Did Walmart Kill the Organic Food Names?

For a number of years, stocks along the entire organic/natural chain have commanded premium valuations versus conventional food peers, as organic foods in general have had higher price points and stronger sales growth.

On April 10th, 2014, Walmart announced a new partnership with privately held Wild Oats that will drive organic food product pricing to about parity with branded conventional food counterparts.

This may have resulted in understandable market pessimism for the players in the space (with the exception of SunOpta STKL, an ingredient supplier). Some were already trending down because of individual problems (ie BNNY) but it seems that in the last month or so since the announcement, every stock- producers and grocers- has weakened in the face of new highs in the staples ETF XLP.





Sunday, April 13, 2014

Working Thoughts on Long-Term Equity Returns

A few semi-random thoughts prompted by the abundance of "statistics" regarding the "stock market." I use " " because sometimes the term is very ill-defined. 

You've all seen them:
- Since 18XX/19XX, the "stock market" has returned X%/Y% per year
- Since 18XX/19XX, the LTM/NTM P/E of the "stock market" is X%/Y% per year
- Since 18XX/19XX , the "stock market" cap to GDP is XX%/YY%
- Since 18XX/19XX, the "stock market" "profit margins" are XX%/YY%

These stats are of limited use because the "stock market" of 18XX is not the stock market of 19XX which itself is not the stock market of 20XX. The stats of the 1991-93 Chicago Bulls stats are irrelevant to the Chicago Bulls today, and some of that is applicable to the "stock market". 

Some of the obvious differences are:
- Stock market composition: just as an example, railroads were a much bigger percentage a hundred years ago than they are now. 

- National GDP has a drastically different profile and is less relevant due to business globalization (and GDP calculations themselves change over time)

However, the biggest difference is that...

- Stocks, as financial assets, are MUCH closer to cash therefore their returns will be MUCH closer to cash longer term

Let me elaborate on how stock are closer to cash vs. 20-50-100 years ago:
- Liquidity when measured in share volumes: easier to transform any one stock in cash within a second for many market participants 
- Liquidity when measure in how the stock can be transformed to cash: sale, sale of covered calls, short-sale of index against a portfolio, etc.
- Liquidity when measured in transaction costs, both commissions (zero in some cases) and slippage 
- Lower diversification cost: one can get a Vanguard index fund at 0.10% annual cost
- The low cost to diversify has led to more diversification (index products), and these are the most liquid names
- Lower information risk: easier to see if a company is a fraud (incl. whether it actually exists), easier to see who the other holders are, easier to see reliable, periodic, audited financial statements, etc. 
- In some cases, partial or full sales data for companies is available in near-real time (i.e. scanner data for CPG from Nielsen)
- In other cases, company returns are pre-set (i.e. regulated utilities that are allowed to mark-up your power bill as they see fit to get the commission-allowed ROE) 
- In other cases, revenues are reasonably foreseeable (i.e. "pre-sold" or hedged production in oil and gas) 
- In general, if you think about it, there are a lot fewer "dark corners" and "black boxes" now. Most of the outright fraud is confined to the OTC markets or in regulatory capture (which benefits shareholders for the most part)

That is not to say that we won't have 1987 or 2002 or 2008 ever again: stock are still influenced by panics, excessively high or low expectations, supply and demand, margin debt/forced selling, taxation of gains and dividends, etc. as they always have been. Maybe HFT and algos are a bigger risk. But one probably should not expect the 10- or 20- or 30- year returns from a century ago when a lot more risks and costs had to be priced in. 

Friday, March 14, 2014

Charting US Retail: Not Mean-reverting

I've been harping for some time on Twitter that traditional US retail is no longer a mean-reverting industry. I've selected 36 charts of well-known and not-so-well-known retailers that are at XX% off their pre-crisis or post-crisis high to illustrate my point. Some a pure retailers, some are both wholesalers and retailers (ie CROX).

Surely some retailers are doing better but also there is a good number that have liquidated in the last few years (ie Borders, Circuit City, Mervyn's, Loehmann's, Syms, Filene's, etc.) as well as unsuccessful offshoots (ie Structure, Ruehl)

My thinking is that the lack of mean-reversion is driven in part by online shopping (not only direct substitutes but also reducing physical shopping trips), in part by demographics and in part by stagnant real discretionary incomes for the bottom YY% of the population.

Also beware of any thesis heavily based on the putative "value" of a company's retail real estate or overly optimistic vacancy and rent increase projections.

Update 3/24/14: this is what traffic has looked like. The rest of the charts are from the original post.