http://fpafunds.com/pdfs/commentaries/Caution_Danger.pdf
CAUTION: DANGER AHEAD
Speech to Institute for Private Investors
By Robert L. Rodriguez, CFA
Managing Partner and CEO
February 15, 2012
*
"I hope that this brief historical review of my career should help allay fears that what follows
does not come from the likes of a perennial pessimist and doomsayer. Neither does “CAUTION:
DANGER AHEAD” spring from recent capital market volatility. Oh, No! When I left to take my
sabbatical for a year in 2010, I conveyed to my associates and clients that the current crisis was
only Phase 1, and the coming year would prove to be simply an interlude. If the nation’s unsound
fiscal policies persisted, within 3 to 7 years, it would face another financial crisis of equal or
greater magnitude, and it would emanate from the federal level. I wish I had said sovereign level,
covering all my bases, but I did not arrive at this conclusion until once away on sabbatical when
my attention and thinking shifted to the international area--European sovereign debt in particular.
Phase 2 is now beginning and I think we are on the cusp of a decade of extreme economic and
financial market turbulence. Uncertainty as to the effects of high system wide
financial leverage and the outcome of the battle to determine what the proper roll and magnitude
of government should be within an economy are key elements in this future turmoil."
"In stocks, we are cautious -- defensive but opportunistic."

Hi Ted,
I was about to submit the same reference when I discovered you were many hours ahead of me. That's always the case. I should have anticipated this action from the master Linkster.
Jason Zweig is an excellent financial columnist, and this article is especially insightful. The current piece is data dense, and serves a meaningful warning of possible dangers caused by the extensive use of Index products by institutional elites.
The article is chock full of takeaway investing wisdom and hints. Everyone, please take a peek at Ted's Link; I think it will be worth your time.
A decade ago, Index operations only cornered 16 % of the marketplace; today the commitment is more like 33 %. There is logic propelling that trend.
The amazing part of that statistic is that institutional agencies have become frontline buyers and quick trigger finger traders of Index products. When they trade, they trade in large, almost coordinated, volume; they are market movers. The overarching market wide impact is increased volatility.
I find it interesting that the smartest guys in the investing universe (most education, most experience, full time research staff, unlimited resources) have become large Index participants. There is a lesson here.
The article cites a research study that reports only 17 % of mutual funds investing in US equities beat their benchmarks in 2011. That’s sad, but consistent with a plethora of earlier studies that often report a similar statistic that hovers around the 30 % mark. So 2011 was a particularly miserable year for active mutual fund management.
An active fund manager’s life is a daunting challenge, especially when tasked to overcome the funds expense ratio hurdle. Standard and Poor’s will release its SPIVA Active versus Passive fund manager performance comparison study in a few weeks. My guess is that it will reinforce the finding that Zweig summarized. SPIVA will add further detail that will reveal where active management did outshine its benchmarks.
The institutional world often analyzes alike, shares common goals, is lemming-like in behavior (you escape blame if you follow the crowd), and invests in lockstep. This predictable behavioral pattern not only enhances volatility, it also is a contributing factor in shrinking the benefits of diversification.
Because of these activities, investment category correlation coefficients have been moving toward a value of unity, One, perfect lockstep.
Don’t despair. If you believe in broad portfolio diversification to reduce overall portfolio volatility and risk (I do), the simple solution is that a much broader diversification is needed as a compensation mechanism to battle the correlation coefficient trendline. Investment class correlations are never perfect and are never static. They change over time as categories become more and less popular with the investing cohort. And don’t overlook fixed income positions when constructing your personal portfolio holdings.
Just review the checkerboard mix of performance results that the Periodic Table of Investment Returns matrices display on an annual schedule from sources such as Callan Associates and Allianz Global Investors. I have referenced and Linked these sources in past postings. They visually demonstrate the significance and benefits of worldwide category diversification.
Enjoy Zweig’s weekend WSJ article titled “Simple Index Funds May Be Complicating the Markets”. That may be true, but, overall I still believe they simplify my portfolio, and still represent a meaningful percentage (not all) of it.
Best Regards.

http://www.sec.gov/Archives/edgar/data/709364/000090630412000359/rse497-212.htm
Effective after the close of business (4:00 p.m. EST) on Wednesday, February 29, 2012, Royce Special Equity Fund will be open only to existing shareholders and existing relationships.
The Fund will remain open to the following:
Existing investors – in their own name or as a beneficial owner of shares held in someone else’s name – for example, a nominee, custodian or omnibus account holding shares for the benefit of an investor would not be eligible to open a new account for its own benefit or for the benefit of another investor, but the investor would be eligible to open a new account in the Fund;
Registered Investment Advisors with existing clients in the Fund. Registered Investment Advisors who currently have clients in the Fund may open new accounts as well as add to existing accounts in the Fund;
Certain pre-approved asset allocation based investment programs and, for a limited time, initial investments by certain institutional investors approved by the Fund’s investment adviser;
Certain pre-approved “Retirement Plans” offered through certain broker-dealers with accounts held on the books of the Fund through omnibus account arrangements (either at the plan level or at the level of the financial intermediary). “Retirement Plans” include 401(k) plans, 457 plans, employer sponsored 403(b) plans, defined benefit pension plans, profit sharing plans, nonqualified deferred compensation plans, other similar employer-sponsored retirement plans and rollover accounts from such plans to individual retirement vehicles such as Traditional and Roth IRAs.
Existing shareholders in other Royce Funds will not be permitted to open new accounts in Royce Special Equity Fund after February 29, 2012 nor will they be permitted to acquire shares of these Funds by exchange. Fund distributions will continue to be reinvested, unless a shareholder has elected otherwise.
Royce reserves the right to: (i) make additional exceptions that, in its judgment, do not adversely affect its ability to manage the Fund; (ii) reject any investment or refuse any exception, including those detailed above, that it believes will adversely affect its ability to manage the Fund; and (iii) close and re-open the Fund to new or existing shareholders at any time.
February 17, 2012

Howdy msf,
Thank you for your continued efforts in presenting the facts and details related to the financial and investment areas. All here are much the wiser from your work.
Take care,
Catch

"SAN FRANCISCO (MarketWatch) -- Fairholme Capital Management's Bruce Berkowitz scaled back exposure to financial and telecommunications companies during the fourth quarter, according to a regulatory filing submitted Tuesday."
> When you go from over $21B at the beginning of the year (2011) to under $8B in assets by the end of the year (in fact they are at $7.4B now) --- you've got to (or actually forced to) scale back your positions especially if you want to keep at least some cash buffer space as that all got completely depleted from redemptions.

http://news.morningstar.com/articlenet/article.aspx?id=536868
budget alarm unnerved muni bond market
http://www.onwallstreet.com/news/muni-bond-market-reacts-to-obama-budget-proposal-2677358-1.html?ET=onwallstreet:e5807:2131761a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=OWS_Daily__021412
when bond ETPs don't make distributions
http://etfdb.com/2012/when-bond-etps-dont-make-distributions/
is there a bubble in dividend ETFs
http://www.etftrends.com/2012/02/is-there-a-bubble-in-dividend-etfs/?utm_source=iContact&utm_medium=email&utm_campaign=ETF Trends&utm_content=
RBC wealth investment weekly commentary:
RBC Wealth Management
Michael D. Ruccio, AAMS
Senior Vice President
25 Hanover Road
Florham Park, NJ 07932-1407
(p) (866) 248-0096
(f) (973) 966-0309
[email protected]
www.rbcwm-usa.com
Market Week: February 13, 2012
The Markets
Concerns about whether Greece would fulfill the conditions necessary to obtain a second bailout brought on the first down week of 2012 for the domestic equities indices (except for the Dow, which had a down week in late January). Meanwhile, 10-year Treasury yields remained relatively stable as investors continued to seek out bonds.
Market/Index 2011 Close Prior Week As of 2/10 Week Change YTD Change*
DJIA 12217.56 12862.23 12801.23 -.47% 4.78%
Nasdaq 2605.15 2905.66 2903.88 -.00% 11.47%
S&P 500 1257.60 1344.90 1342.64 -.17% 6.76%
Russell 2000 740.92 831.11 813.33 -2.14% 9.77%
Global Dow 1801.60 1976.98 1964.70 -.63% 9.05%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 1.89% 1.97% 1.96% -1 bps 7 bps
*Equities data reflect price changes, not total return.
Last Week's Headlines
Greece's coalition government reached an agreement on austerity measures needed to receive the second bailout from its peers, and at the insistence of the eurozone's finance ministers, the agreement was approved by the full Greek parliament. To protest the measures, Greece's unions called a 48-hour strike over the weekend and demonstrators took to the streets.
Five major banks will pay $26 billion to settle a suit by 49 state attorneys general and federal officials over faulty foreclosure procedures, and nine other financial institutions are also in negotiations over the same issue. According to the agreement, $17 billion will be used over the next three years to assist homeowners, and 60% of that amount will help reduce principal on qualifying mortgages.
According to the Commerce Department, higher imports of autos, auto parts, and industrial machinery helped push the U.S. trade deficit to $48.8 billion, the highest level since June. Imports rose 1.3% while exports were up 0.7%.
Eye on the Week Ahead
European economic growth data and Wednesday's meeting of eurozone finance ministers, when final approval of the newest Greek bailout is expected in the wake of last weekend's parliamentary vote, will be a focus of attention. Domestic data on inflation, manufacturing, and housing also will be watched.
Key dates and data releases: retail sales, business inventories (2/14); Empire State manufacturing survey, industrial production, Federal Open Market Committee minutes, international capital flows (2/15); housing starts, wholesale inflation, Philadelphia Fed survey (2/16); consumer inflation, index of leading economic indicators, options expiration (2/17).

I am curious how people intend on positioning their overall investments / portfolio when inflation (eventually) kicks-in? Inflation may be still off in the distance but once it appears in earnest, it seems it will be hard to stop and am guessing the folks in Washington may not want it stopped.
Given my relatively novice skill set and experience level, I'm not sure what type of investments (including non-financial) would be prudent to own.

David - looks like Grandeur Peaks likes what you had to say --- on their website...
http://www.grandeurpeakglobal.com/
...they provide links to David's WSJ interview and glowing review of their fund.
So far I really like what they have to offer --- their passion for global investing, excitement in starting their own firm, lots of travel and time on the ground to visit companies, their global analyst team and ease of communication with their firm.
Here's a sample of some stocks mentioned by Grandeur Peaks in their 4th qtr report that they own:
====================================================
Hy-Lok Corporation
Hy-Lok is a $240 million market cap company based in Busan, South Korea. Hy-Lok generates about $100 million of annual revenue as a global leader in fluid control precision. They make very high-tech fittings and valves, which are distributed across the globe and used in a variety of industries. Founded in 1977, the company has been listed on the KOSDAQ (Korean NASDAQ) since 1989. The stock was
up 19% in the fourth quarter and contributed 30 basis points to the overall return of Global and 30 basis points to the overall return of International.
Bertrandt AG
The Bertrandt Group is a $500 million market cap company based in Ehningen, Germany. Bertrandt generates about $750 million of annual revenue providing outsourced R&D and other services to the automotive and aerospace industries. The company was founded over 35 years ago. The stock was up 25.8% in the fourth quarter and contributed 24 basis points to the overall return of Global and 25 basis points to the overall return of International.
Banco ABC Brasil
Banco ABC is a $1.7 billion market cap commercial bank based in São Paulo, Brasil. The bank has about $6 billion in assets and provides a range of financial products and services to medium and large companies in Brazil. It focuses on corporate credit, capital markets, and treasury operations. The stock was up 17.1% in the fourth quarter and contributed 19 basis points to the overall return of Global and
23 basis points to the overall return of International.
Tegma Gestao Logistica
Tegma is a $1.7 billion market cap company based in São Paulo, Brasil. They are one of Brazil's largest logistics management companies, and a leader in the automotive industry. They are experts in providing customized and innovative logistics solutions focusing on three core market segments: the automotive industry, road transport, and warehousing and handling. The stock was up 15.8% in the fourth quarter and contributed 14 basis points to the overall return of Global and 28 basis points to the overall return of International.
Vitasoy International Holdings
Vitasoy is a $5.9 billion market cap company based in Hong Kong that was founded in 1940. They are a global leader in soy-based beverages and foods with annual revenues of $500 million. The stock was up 13% in the fourth quarter and contributed 12 basis points to the overall return of Global and 19 basis points to the overall return of International.

This Bio from M*
Andrew Foster
10/31/2006 — 03/21/2011 Andrew Foster is a Portfolio Manager at Matthews International Capital Management, LLC. Andrew joined Matthews in 1998 as a Research Analyst, and has held a number of positions at the firm during his tenure, including Director of Research, and acting Chief Investment Officer. Andrew began his career in Singapore, where he worked as a management consultant in A.T. Kearney’s Financial Institutions Group. He holds an A.B. in Public Policy and a secondary degree in Economics from Stanford and an M.B.A. from INSEAD in France.
Mr. Foster had an excellent performance at MAPIX,basically in the top 10% for his 4 1/2 years there.
http://performance.morningstar.com/fund/performance-return.action?t=MAPIX&region=USA&culture=en-us

Reply to @Anonymous:
I think most people with the desire and time can absolutely make their own financial decisions.
In terms of mutual funds, it really depends on your age (as if you're 30, recommendations are going to be a lot different than if you're 60) and desired risk tolerance. There are thousands of mutual funds - while Fidelity and Vanguard have some very good ones, limiting to a couple of companies is well, quite limiting.

Hi there Grover, and welcome to MFO. I think that maybe you need to be more specific with your question. Are you talking about a paid personal money manager who will help you with your personal financial decisions (what funds to choose), or the manager of a well-run mutual fund?
If the latter, then I think that you'll need to be more specific yet, depending upon the type of mutual fund that you're interested in. Personally, I use American Funds for a variety of reasons, and their funds are run by various managerial teams, to deliberately minimize the "star manager" approach. I don't recommend American Funds though, because they charge a front "load" when you purchase, and there are plenty of other fund families out there who can do just as well for you without that load charge.
Because we have primarily used American funds, others on this board will be in a much better position to help you, based upon their very considerable experience.
Additionally, to get the feel of what constitutes good (or bad) fund management, I suggest that you at least skim through David Snowball's commentaries, available by pushing the "Commentary" button at the top of the page.

My wife and I are new to the financial planning world. We are interested in buying a mutual fund and keep finding in our research that a money manager with a good "long-term track record" is very important. Are we talking 5 or 10 (or more) years of good consistent money managing? Specifically, what constitutes a money manager with a good track record?

Morning Coffee,
Mr. They Got Other Fish To Fry (me); has a head scratch going with a portion of this write. Regardless of your opinion of Bill Gross, this is an interesting, multi-faceted story regarding Pimco.
A snippet: "More troubling, U.S. regulators are now considering whether PIMCO should be deemed a "systemically important financial institution" - that is, too big to fail, and thus subject to tighter regulatory oversight. The concern: The juggernaut manages so much money for pension funds that it could hammer the economy if it ever went under. The firm has doubled in size to $1.36 trillion in assets since the collapse of Lehman Brothers in 2008."
http://www.reuters.com/assets/print?aid=USTRE8180VX20120209
Regards,
Catch

Hi there Hank- No, I can see what you're saying too. The main problem, at least as I understand it, really isn't the individual depositors/investors losing some part of their money. The thing is that the great majority of the money in these funds doesn't just sit around waiting for someone to ask for it back. No, it's used for short-term financing in many parts of the overall commercial, industrial and financial industry... loans to a huge spectrum of business customers who depend upon this source being constantly available for short-term roll-over paper. If this financing source suddenly freezes without warning, many very bad things follow in a very short period of time.
So the issue seems to be really another manifestation of the "too-big-to-fail" syndrome. Reserve Primary did stupid things, the "average investor" (ie "ignorant investor") didn't wait around to see if it was a localized problem- they saw the possibility of losing their "safe" money, we got a classic "run on the bank", and came very close to precipitating a totally unnecessary national financial panic/shutdown. You know how interrelated all of this major financing apparatus is.
If the MM funds were simply loaning this money to the gov't and taking gov't paper as security, then the gov't could use the usual smoke and mirrors to take care of the problem. But if for example all of a sudden the auto financing industry, or the credit-card industry (or maybe both) gets shut down without any advance warning (and how the hell would they know about stupid stuff happening at some mutual fund?), who can possibly control what happens next?
I dunno- maybe we need two types of MM funds- one that's insured, with obviously a lower payout but you get your money when you want it, no questions asked, and one that isn't- a better payout but you take your chances with maybe not being able to grab all of your money when you want it, if something unusual is going on in the financial sector.
As usual, no easy answers to any of this stuff...

got this from Financial advisor
SPECIAL MARKET REPORT
February 2012
SHORT TERM VIBRATION:
It will be difficult for the markets to replicate their January performances in February. After sporting nearly a 7% gain in the first month of 2012, markets are due to take a breather. Because of this, investors should exercise caution in the near term.
During this recent market rally, the market has seen volatility diminish as well. Currently, the volatility index, which is used by many short term traders, suggests that there is a great deal of complacency in the stock market. The present level is measuring around 16, which is only four points off the all-time low measured a few years ago when the market peaked in 2007 before the big crash.
This does not suggest a big downturn is in store for the immediate future, but the likelihood of a measurable 5% or greater correction is extremely great. In other words, avoid chasing many of the stocks that have experienced parabolic jumps in this recent market spurt. Remain patient and allow the markets and stocks to settle in at more reasonable levels before taking positions.
Medium term:
The present strong market conditions have most money managers wanting to chase stocks in order to hit growth benchmarks. This has initially caused the quick burst seen in January. There is a distinct possibility that stocks will consolidate and potentially pullback in the near term. However, after stocks put in a healthy breather, they may be poised to push a little higher into the end of spring.
To take advantage of any more upside in this market may require that investors remain selective in what stocks they buy. Most of the big movers in the early part of 2012 were those stocks and sectors that underperformed woefully in 2011. Sectors such as alternative energy, financials and commodities have exhibited extreme strength so far.
Will that trend continue? It is a question that remains to be answered.
All markets are sitting near multi-year highs. Meanwhile, we have treasuries also yielding all-time lows. Bonds are in a bubble and gold is within striking distance of taking out all-time highs. This scenario poses an intriguing conundrum for all investors because it is extremely rare to see all asset classes sitting at such lofty levels.
In other words, something has got to give.
It would be premature to determine what asset classes will break down and which ones will soar even higher. Investors need to maintain a shorter time frame in holding any of these assets and be willing to trade out of them at the first signs of serious price depreciation. The current mood is suggesting long equities and short treasuries. However, this trade could reverse quickly by the end of the second quarter if Europe continues to stumble and the U.S. economy shows any serious hiccup in its recovery effort. This year the old adage "sell in May and go away" may turn out to be a worthwhile piece of advice worth following.
EXECUTIVE SUMMARY:
Short term indicators suggest equities will remain the place to be, but chasing most of these stocks at present levels may leave some investors being disappointed. If investors have a willingness to remain nimble and can exercise selectivity, the present market rally may continue to offer more gains in equities over the coming three months.
We believe having a defensive asset allocation in a majority of cash; with some selective fixed income, bonds and principle protected investment instruments may be prove to be a wise pose. This is what we would like to term capital preservation growth --- it is getting the most out of assets with the least amount of risk. This is a key strategy for us as we maintain the markets are at an inflection point as all asset classes are near unsustainable tops. Until it is clear which asset class or classes will emerge with more sustainable upside, we believe exercising caution, remaining nimble and diversifying risk is the way to navigate the present, turbulent investment waters.
If you would like to receive Monthly Market Newsletters from the Trader's Desk of Jason Shade, please feel free to sign up for free at www.wallstreetstraighttalk.com. You can also access my daily blogs and other complimentary special reports on my site as well. Thank you for your time and feel free to email me if you would like to discuss anything. [email protected]
Best Regards,
Jason Shade, Financial Advisor
Director of Portfolio Management
Barrington Financial Advisors, Inc,

Reply to @scott: Sears up another 7% today!
I'm also using PFF (iShares US Preferreds ETF) as a more cautious way to get financials exposure as this ETF is packed with financial firms including banks....and I'll gladly take the 6+% yields it produces.
http://us.ishares.com/product_info/fund/overview/PFF.htm?fundSearch=true&qt=PFF

Huge comeback in Financial stocks not only this year but the past 3 months. Sears is also up 45% YTD.

Kudos on the WSJ recognition.
"gather the evidence, assess the evidence, make an argument."
Allocated some to MAINX. Mr. Snowball's perspicacity and experience make for
a tough customer to argue with and I've very much been the beneficiary for agreeing.
How's that go...good judgement comes from experience because experience comes from bad judgement.
"You've also got to find someone who invests in their fund. Funds in which the managers and directors don't have a substantial personal stake consistently underperform the funds where the managers and the directors put their own money at risk."
(sub)Prime example--
http://www.nytimes.com/2012/02/05/business/an-investment-wipeout-that-didnt-have-to-happen.html?_r=2&ref=business
In these cases the managers had a substantial personal stake in their unsuspecting clients heart.
With financial services modus operandi of assymetric informational warfare the customer is always right (in the crosshairs.) Terming the pre-credit debacle activity as dealing with bloodsuckers would be far too kind.
http://roberthood.net/blog/wp-content/uploads/2008/05/leeches2.jpg

Thanks bee this is a good start and I am anxious to use them. Would it not be nice to have a site which embeds your portfolio and sends alerts to you about better opportunities? I guess you can take this to an extreme which would be a revolution
in money management and would be a financial bonanza for the developer.
prince