Hi Guys,
The controversial President’s Plunge Protection Team (the PPT) is Missing-In-Action (MIA). That’s a tongue in cheek opening since I am not a true believer in the tooth fairy.
The PPT is not an urban myth; it is a Washington myth. Its purported market action charter is an illusion. The PPT will not mount its white horse, nor will it ride to rescue our current dysfunctional equity marketplace.
Recall that the basis for the PPT legion was initiated when Ronald Reagan assembled the President’s Working Group several months after the infamous October, 1987 crash. The key players in that group are the Secretary of the Treasury and the Chairman of the Federal Reserve. The dominant characteristic of the group is that its meetings are held in tight secrecy, hence the speculation that their franchise includes indirect and direct equity market interventions. There is no evidence that this myth is grounded in hard data. It makes a great, and comforting story. It is false.
How to explain and understand yesterday’s equity market disarray that was global in scope? That’s not an easy question since its causes are multi-dimensional; it is a complex interactive problem with many root causes. Here is my quick, and incomplete answer.
My assertions (that’s all they are) are based on the Technology Adoption Life Cycle (TALC) model that was reported in 1998 book titled “The Gorilla Game”, with Geoffrey Moore as the primary author. That book established rules on how to choose winners in the high technology world. That same model has application in the entire equity marketplace.
The book states that most progress is continuous, but game changing innovations are discontinuous (like exogenous market shocks), and take time to penetrate the marketplace in totality. The TALC is divided into 5 reaction regimes: (1) Enthusiasts (true believers) (2) Visionaries (first to jump, often wrongly), (3) Pragmatists (the Herd), (4) Conservatives (the late towel throwers), and Skeptics (the real market contrarians).
The Gorilla Game argues that a chasm (a time gap) exists between when there is some small market acceptance by Visionaries and when the bulk of prospective customers (the Pragmatic and Conservative segments) are prepared to change their habits. The Herd likes the status quo and requires some special motivation. The chasm is jumped when small subsets ( a micro minority within the macro Pragmatic group) are provoked (perhaps panic and/or fear tilts the decision) into action.
The market reaction gains momentum as the basic instinct of the herd takes hold. The Gorilla Game calls this phase the Tornado, a phase that is dominated by rapid rates of change, a panicked herd, a real stampede. Dies this seem familiar?
What prompted the stampede? That’s difficult because it has many moving parts. Certainly the proximate global crisis crystallized with the Italian announcement. Within the United States, the proximate cause could be ascribed to the poor GDP growth rate that seems to be constantly revised downward, the stagnant unemployment numbers, and uncertainty over government inaction and regulations. We also had a perfect storm scenario in that the S&P 500 Index 200-day moving average was about to be penetrated in conjunction with these other real world events. So automatic technical indicator signals were penetrated and reinforced world happenings. These were all triggering events.
On a longer time scale, several disturbing patterns are evolving and make recovery more challenging.
Our acceptance of excessive debt financing needs to be controlled, both public and private. If you believe our public debt is enormous and dangerous, you should explore just how much our private debt has mushroomed. It puts great downward pressure on spending which is 70 % of the US economy.
In his 2008 book “Bad Money”, Kevin Phillips notes that our Financial industries contribution to the GDP is now larger than the percentage generated by our Industrial segment (like 20 % to 12 %). Phillips observes that our dominant and growing dependence upon financial invention does not speak well for our National’s retention of world leadership. Historically, when money matters dominated economic policies, the wealth of the nation deteriorated. The fall of great superpowers like Spain in the 16th century, like Holland n the 17th century, and like Great Britain in the 20th century can be traced to an oversized commitment to financial matters. The good news is that the United States has many more resources (especially its size and its persistent, resourceful, and innovative people) at its disposal.
In his classic book “The Rise and Fall of the Great Powers”, Paul Kennedy identifies military expenditures used at first to expand empire, and later to defend that empire, as a major component in the declining years of a superpowers lifecycle. The same players that Phillips mentioned are highlighted in Kennedy’s tome. The good news here is that the US is not an expansionary nation, and the GDP fraction that it expends on our military institutions is shrinking. My belief is that we should not necessarily diminish its size, but should reallocate its global presence.
So, what to do? As a cohort, those participating on this forum are not market timers, we are not day traders. That is clearly established since we basically own mutual funds, and were prohibited from acting during the panic. When Thursday ended, we had already absorbed a 3 % to a 5 % decrease in our equity holdings wealth. That’s gone. Might the marketplace suffer more losses? Probably a little more, since momentum persists. But will the market totally meltdown?
My answer is a loud NO.
Our real resources remain intact. We have suffered no wars, no destroyed homes or even boken windows caused by natural disasters. Our losses are more mental than real. We will recover, and we will recover smartly. Market prices are a bargain. Price to earnings ratios are attractive. Our corporate cohort has strong financial balance sheets and has money to invest. On a global basis, our relative strength is improving. Foreigners have already recognized our relative stability and are investing in government bonds.
I will stay the course. I can do this since I have plenty of reserve cash. I hope you all are in a similar position. Be brave. The PPT is MIA, but we're OK.
I prepared this posting very quickly without checking facts and without even proofreading this submittal. I hope my errors are minimal, and that the posting makes some small sense.
Best Regards.

Another possible problem is that as of late some financial institutions have begun charging a fee for every POS (point of sale transaction) which seems to run about 25 cents each time you use their debit card for a purchase, but could be higher. Not saying these do, but check out the fine print before leaping as it appears most on that list require some POS transactions to receive the interest rate.

With respect, I don't see the point in buying an active fund manager, who in my case eats his own cooking and then handicap/dismiss him by the volatility (sic) of his fund. If I own funds that are not volatile it is more because the fund manager worries about permanent loss of capital, equating THAT with risk. There is a difference between cause and effect.
Anyone worried about beta should be buying index funds. After all beta is a relative and not absolute measure. A lot of people - myself included - lost money because they didn't know what the F they were doing. They were letting those peddling financial pron influence their decisions. And they continue to do so. Beta, Theta, Omega. This used to be a joke - there are three kinds of lies : lies, damned lies and Statistics. I don't consider that a joke anymore. Here's another one - Statistics is like a Bikini; what it reveals is interesting, but what it conceals is vital. I don't laugh when I hear that anymore either.
Buying an active fund means assuming manager risk first and foremost. Market risk is secondary. Buying a sector fund is obviously more risky than buying a more diversified fund since one is putting more of ones eggs in a more narrowly scoped basket obviously more susceptible to changes in like securities. I can buy that THIS is risky. If sector funds are ALSO more volatile than ANY benchmark one wants to compare against, that's incidental.
Again, Beta is Elementary. Homework is Fundamental.

Hi Guys,
Are you curious about the roots, the principle actors, and the interconnectivity that caused the housing bubble and its financial support system to inflate and then implode?
If you are and want to satisfy that curiosity in a painless way, I suggest you secure a copy of Michael Lewis’s 2010 book “The Big Short”.
Lewis’s reporting is not pure academic research, but it seems to be an accurate and especially lively record of this wealth destroying event. Michael Lewis is the ultimate storyteller. His most recent book, like those before it, is filled with fascinating characters who played a major role in the development and resolution of the crisis, and permit Lewis to present the complex details of its financial underpinnings (like collateralized Debt Obligations (CDO) and Swaps of these opaque products) in an understandable and comprehensive manner.
“The Big Short” reveals the incentives and the financial machinery that was invented and introduced by a Wall Street that was mostly driven by the profit motive. Lewis names those responsible, and offers no forbearance. The book is filled with villains, but also identifies some unlikely heroes.
At the base of the villain list are the individual home buyers, many of whom simply lied about their jobs and incomes. In the end, the no-documentation loans originated by the loaning agencies and accepted by unqualified home buyers were doomed. Lewis reports about a Bakersfield, California strawberry picker who received a $724,000 loan, the total selling price of the house, when his annual income was merely $14,000. Do you think he survived the market downturn, or could even pay his summer air conditioning electrical bill?
The deceptive practices and misleading interest rate quotes generated by outfits like the failed Household Finance Corporation (HFC) were highlighted. The discredited HFC operation sold loans to uneducated buyers by improperly citing the interest rate on an equivalent 30-year mortgage, that was actually signed on the basis of a 15-year contract. This trickery permitted the unscrupulous lender to quote a false annual rate that was almost one-half the rate he was charging in reality.
The big Wall Street Investment Banks were major players. They not only invented many of these highly leveraged products, but they also did themselves a disservice using grossly faulty statistical analyses methods that underestimated default probabilities and their own Value-at-Risk. In the end, they bought into their own junk science.
Lewis identified Goldman-Sachs, Deutsche Bank, and Morgan Stanley as essential innovators, participants, and big time losers. Some of these firms kept selling their defective products to sophisticated, but unknowing, institutional investors and hedge funds even while the markets for these dubious products were collapsing.
Lewis described several financial advisors whose incentives were profit alone, without regard to protect their unsuspecting, far too trusting, clients. These advisors demanded and were rewarded with high fees for this disservice.
The analytical models were based on a set of doubtful assumptions. The data set timeframe was far too small to be statistically relevant. The modeling wrongly assumed diversification, not only in location, but also in product mix. The models postulated low correlation coefficients when in fact, the correlations approached the perfect level. A normal Bell Curve distribution was embedded in the Black-Scholes formulation that was used to price the products. That also proved to be erroneous. As did the fact that statistical fat-tails and the likelihood of Black Swan events were totally ignored
The statistical characteristics of the various loan pools and their tranches were incompletely documented. Most reports only listed averages without even including standard deviation data. For example, only an average FICO score was reported. That’s equivalent to saying that a group of nine unemployed workers plus Bill Gates had a millionaire’s average earnings level. Improperly formulated statistics can present a very distorted picture. The housing loan statistical modeling was a disaster zone, and gave True Believers a false sense of security.
Almost all housing bubble participants did not recognize the pervasiveness of the subprime lending. Almost nobody recognized that it was the 800-pound gorilla in that segment of the marketplace. Joe Cassano, chief boss at AIG Financial Products, never understood what fraction of his firm’s risk profile was tied to this particular financial structure. Yale professor Gary Gorton, the expert who built the AIG-FP model, never appreciated the percentage of subprime loans to which AIG was exposed. True risk mitigation by diversification was not accomplished in any of these first tier financial firms.
The rating agencies, Standard and Poor’s, Moody’s and Fitch, also participated in the Kabuki dance. They were complicit in allowing substandard housing loans that were well below triple-A quality to be repackaged in a manner that allowed these defective loans to be reevaluated as investment grade quality. The rating agency people were hoodwinked by the Wall Street crowd. That’s almost to be expected since the rating agency pay scale is so depressed relative to what Wall Street pays its employees. The smartest financial folks migrate towards the deep money incentives.
Somehow these rating companies deceived themselves that they possessed the power to convert Lead unto Gold. The Gold Rule wins again; he who has the Gold, dictates the Rules. And Wall Street has the Gold.
As a sidebar, the Rating firms claimed that their scoring was misinterpreted and misused. They argued that their assessments were quantitative, not qualitative. Hence the outfits using their judgments should not have assigned a failure probability based on the scoring; the scoring only yielded a relative ranking.
This is a rather long list of villains. But there were some heroes, at least given a modest definition of hero. There were a few individuals who recognized the pitfalls that were imbedded in the sub-prime real estate derivatives markets. Michael Lewis gives the story heart and pathos by introducing these less than perfect money managers to us. Although this small group viewed the market from distinctly different perspectives, they each saw the cracks in the smoke and mirrors charade.
Here is a short list of some of the unlikely heroes; Michael Burry of Scion Capital, Charlie Ledley of Cornwall Capital, and Steve Eisman of FrontPoint Partners. These men were short sellers during the mid-2000s and made enormous profits for their hedge fund clients. Each of their stories is unique and captured in Lewis’s engaging storytelling.
You must read the Lewis book to get a more precise picture of the short sellers contribution to the story line. I recommend that you do. The Big Short documents the chicanery that bank lenders and Wall Street perpetrated on a too trustworthy public. It once again demonstrates the need to be a skeptical investor. As one of the characters in the Lewis book constantly asked: “How are they going to screw me?” In Wall Street dealings, that is a relevant and necessary question.
There are plenty of lessons to be learned from the housing market debacle and from the financial mess that fueled and exacerbated the bubble. From a grand macroeconomical perspective, it demonstrated the complexity, the interconnectedness of that rugged landscape.
In economics, things do not happen in isolation. As the French economist Frederic Bastiat noted by the title of one of his most important essays “That Which is Seen, and That Which is Not Seen”, it is critical to identify and to assess the secondary and perhaps unanticipated effects of any market action. The subprime housing debacle is yet another illustration of unintended consequences.
Another enduring lesson learned from the housing market crisis was that leverage kills. The Wall Street investment banks were typically leveraged by multiples of over 10 to 1 ratios in their oversized commitments to CDOs and the insurance CDO swaps that they also sold. They lost billions.
On a very practical lessons learned level, the housing bubble and its crash demonstrates yet again the pervasiveness of the money incentive. That’s almost a given since we are mostly in the marketplace to satisfy our financial goals. As always, its good investment policy to follow the incentive money trail.
You will enjoy the stories that make “The Big Short” a lively read. You will also learn some of the how, who and why of the subprime real estate derivatives fiasco. You will be a wiser investor from learning its lessons.
In his book’s Epilogue section, Lewis finds that “Everything is Correlated”. Indeed it is. The primary theme of Complexity Theory is the interconnectivity that ties global agents together. Especially today, one event triggers many reactions, some positive and some negative. Expect a cascade of primary, secondary, and tertiary avalanches. Marketplace correlation coefficients have become tighter with time. Recall, no happening is an island onto itself. We often can not identify the potential network of interactions.
Best Regards.

"Late Monday, the Chicago Mercantile Exchange, the main center for the trading of derivatives, one of the major forms of financial speculation, announced that it would no long classify short-term Treasury bills as risk-free when used as collateral by traders. The exchange also will require traders to provide larger amounts of longer-term Treasury bonds when using them as collateral.
The “haircuts” applied to the value of government securities used as collateral for trades ranged from half a percentage point for Treasury bills to a full percentage point for Treasury notes and bonds, with the changes to take effect on Thursday. (July 28)
The CME justified the increases as a response to the greater volatility in the prices of US government securities because of mounting speculation that there will be at least a short-term interruption in US government payments to bondholders."

I would never say never. But it would seem very unlikely that bond funds, as a whole, will tank if there is no agreement. And there will be an agreement eventually. That being said, I don't know why anyone should own a long-term, long-only U.S. government bond fund. I believe that if investors use flexible-mandate fixed-income funds that have relatively short to intermediate maturities and reasonable duration, there should be no lasting fallout. The worst thing people could do would be to sell funds based on what surely will likely be a short-term effect, if it occurs. This is another media-concocted crisis du jour, but it's lasted for several months now. Once we are past it, the wonderful folks in New York will find something else that will surely mean the end of the financial world as we know it.

Maybe I missed it, but I don't where in this article it says what ETNs invest in. All I can find is a sentence referring to the businesses of MLPs, and that is incomplete: "90% of the MLP’s income needs to come from real estate, commodities or natural resource services and operations to qualify for the tax perks". This description omits financial MLPs like the Blackstone Group (BX).
It concludes with the assertion that "The only drawback to an ETN is that it represents an unsecured obligation of a bank behind it." Perhaps I'm reading too much (or not enough) into this statement, because what it says to me is that the only unique risk of the ETN structure (i.e. beyond the risks of investing in MLPs, and in securities in general) is the risk of default. But there are other ETN-specific risks. Some ETNs are callable. Quoting from Alerian Infrastructure ETN prospectus Selected Risk Factors: "UBS may elect to redeem all outstanding Securities at any time .... If UBS exercises its Call Right, the Call Settlement amount may be less than the Principal Amount of your Securities."
(Part of the reason I didn't use ALJ's prospectus is that JP Morgan doesn't post it on its site, referring readers instead to the SEC. Yet their FAQ keeps saying: as we said in our prospectus and supplement .... I'm inherently suspicious of any offering where the company makes it as difficult as possible to find its legal disclosures. But it has the same call problem.)

Back in May I received great feedback here as I grappled with whether I needed to retain a financial adviser to help manage my retirement portfolio. I opted to keep it simple and stay with Vanguard, switching to three index funds and rollover my 401K to an IRA. Among the several good suggestions was one from MJG to read Daniel Solin's "The Smartest Investment Book You'll Ever Read." I just finished it and it is fabulous! It is an easy and entertaining read which makes a powerful case for limiting a portfolio to index funds only. The historical data is overwhelming that precious few funds beat the market over the long haul. Two closing thoughts: I wish Solin would update the book since it published in 2006. It could be useful to have his data and insights covering the turmoil and volatility of the last five years. And I'd suggest David add the Solin book to his best books list elsewhere on the MFO board. Thanks again, MJG. Next, Burton Malkiel's "A Random Walk Down Wall Street."

Do not forget M* has a big chunk of the financial porn employer as well. Investment management makes strange bedfellows.

A Saturday morn'in howdy to you,
The old Funds Boat "staff" will be in and out of the office for the next few weeks; so, this will likely be the last post for a bit. There were no buys/sells since last week's post.
IF DEBT could write a song, fighting for its life; the following lyric seems to fight the bill. Hopefully, you will have the same cranial connection as this house; via the link and lyric just below. Our funds holdings data is just below the music section.
Take care of you and yours,
Catch

Don't Make Me Over
Don't make me over
Now that I'd do anything for you
Don't make me over
Now that you know how I adore you
Don't pick on the things I say, the things I do
Just love me with all my faults, the way that I love you
I'm begging you
Don't make me over
Now that I can't make it without you
Don't make me over
I wouldn't change one thing about you
Just take me inside your arms and hold me tight
And always be by my side, if I am wrong or right
I'm begging you
Don't make me over
Don't make me over
Now that you've got me at your command
Accept me for what I am
Accept me for the things that I do
Accept me for what I am
Accept me for the things that I do
Now that I'd do anything for you
Now that you know how I adore you
Just take me inside your arms and hold me tight
And always be by my side, if I am wrong or right
I'm begging you
Don't make me over
Don't make me over
Now that you've got me at your command
Accept me for what I am
Accept me for the things that I do
Accept me for what I am
Accept me for the things that I do
The immediate below % of holdings are only determined by a "fund" name, the M* breaddown is at the end of this write; and a bit more realtistic, although with flaws, too.
CASH = 14.6%
Mixed bond funds = 78%
Equity funds = 7.4%
-Investment grade bond funds 12.2%
-Diversified bond funds 18.5%
-HY/HI bond funds 28.4%
-Total bond funds 14.6%
-Foreign EM/debt bond funds 4.3%
-U.S./Int'l equity/speciality funds 7.4%
This is our current list: (NOTE: I have added a speciality grouping below for a few of fund types)
---High Yield/High Income Bond funds
FAGIX Fid Capital & Income
SPHIX Fid High Income
FHIIX Fed High Income
DIHYX TransAmerica HY
DHOAX Delaware HY (front load waived)
---Total Bond funds
FTBFX Fid Total
PTTRX Pimco Total
---Investment Grade Bonds
DGCIX Delaware Corp. Bd
FBNDX Fid Invest Grade
OPBYX Oppenheimer Core Bond
---Global/Diversified Bonds
FSICX Fid Strategic Income
FNMIX Fid New Markets
DPFFX Delaware Diversified
TEGBX Templeton Global (load waived)
LSBDX Loomis Sayles
---Speciality Funds (sectors or mixed allocation)
FCVSX Fidelity Convertible Securities (bond/equity mix)
FRIFX Fidelity Real Estate Income (bond/equity mix)
FSAVX Fidelity Select Auto
FFGCX Fidelity Global Commodity
FDLSX Fidelity Select Leisure
FSAGX Fidelity Select Precious Metals
RNCOX RiverNorth Core Opportunity (bond/equity)
---Equity-Domestic/Foreign
CAMAX Cambiar Aggressive Value
FDVLX Fidelity Value
FSLVX Fidelity Lg. Cap Value
FLPSX Fidelity Low Price Stock
.......MORNINGSTAR PORTFOLIO VIEW below.......
Asset Class %
Cash 12.28
U.S. Stock 13.12
Foreign Stock 4.05
Bond 62.97
Other 7.58
Not Classified 0.00
Stock Style %
Large Value 11.01
Large Core 14.47
Large Growth 29.64
Mid-Cap Value 12.57
Mid-Cap Core 7.75
Mid-Cap Growth 7.60
Small Value 6.78
Small Core 4.67
Small Growth 5.40
Not Classified 0.10
Stock Sector Portfolio %
Cyclical 68.79
Basic Materials 5.51
Consumer Cyclical 58.36
Financial Services 2.89
Real Estate 2.03
Defensive 9.54
Consumer Defensive 5.51
Healthcare 3.75
Utilities 0.27
Sensitive 21.67
Communication Services 2.57
Energy 7.45
Industrials 3.59
Technology 8.06
Not Classified 0.00
Stock Type Portfolio % VS S&P 500
High Yield 0.11 0.23
Distressed 3.57 0.67
Hard Assets 6.91 13.29
Cyclical 69.64 43.93
Slow Growth 5.14 14.80
Classic Growth 0.75 6.73
Aggressive Growth 5.52 16.15
Speculative Growth 0.87 1.98
Not Classified 7.50 2.22
Fees & Expenses Average Mutual Fund Expense Ratio (%) 0.75
World Regions %
North America 61.02
UK/Western Europe 4.20
Japan 0.87
Latin America 2.33
Asia ex-Japan 1.83
Other 0.30
Not Classified 29.45 (AAARRRGGGHHH !!!!!)
Stock Stats Average for This Portfolio Relative to S&P 500 (1.00=S&P)
Price/Earnings Forward 14.46 1.03
Price/Book Ratio 2.14 1.02
Return on Asset (ROA) 7.74 0.91
Return on Equity (ROE) 18.47 0.88
Project Earnings Growth-5 Yr (%) 12.77 1.29
Yield (%) 4.38 2.58
Avg Market Capitalization ($ mil) 10,260.29 0.20
Bond Style %
High-Quality Short-Term 0.00
High-Quality Intermed-Term 0.00
High-Quality Long-Term 0.00
Medium-Quality Short-Term 3.53
Medium-Quality Intermed-Term 14.77
Medium-Quality Long-Term 0.00
Low-Quality Short-Term 16.10
Low-Quality Intermed-Term 33.45
Low-Quality Long-Term 5.28
Not Classified 26.88 (AAARRRGGGHHH !!!!!)

Thanks Scott for the feedback. These are the things I was looking for which I don't understand yet. Again, I'm really brand new to investing. So I'm taking a lot in right now, and feeling a bit overwhelmed and unsure about my decisions. So I appreciate the info. I think to, I'm not sure where to look for good info or what I should trust.
Regarding the global markets, I certainly want to understand them more, I think it's more for me at this time, that is even more overwhelming. I think what's more important to me right now is to not make any decisions that I don't really understand what I'm doing. I'd rather play it safe and buy less risky funds. Hence why I own a lot of LEXCX and several conservative and moderate allocation funds right now.
I like the idea of increasing my risk, but again I want to make smart decisions. So I'm not necessarily looking to get into any specific area, such as financials, unless I really think it has the potential to outperform other areas.
With all that said, I will take that advice and for the time being hold off on any financial funds and instead continue to try and better understand the markets better.
Thanks again.

I'm not against the idea of financials turning around (the catalyst for that is beyond me), although the whole sector could always become cheaper. However, if I had interest, I'd view this as a supporting play rather than a large chunk of the portfolio. In terms of a supporting player, I'd go with Burnham Financial Industries (BURCX), which has not done as well in the last 12 months or so, but is a good financial sector fund with a solid manager - the fund can also go long/short and only lost 7% in 2008. I'd go with that for a *little* of the portfolio if I wanted to play a bounce in financials, or go with a little (little) bit of the ultra financials sector fund for a trade.
Bank of America's book value, according to Yahoo Finance, is $21.15. It's currently trading at $9.88. It reminds me of a CNBC interview with Jim Rogers where the reporter kept persistently asking why he didn't like BoA. She kept going on about the book value. He told her to forget what the screen was telling her - that the people at Bank of America don't even know what the book value is. There is no clarity on these entities, and given the fog that is caused by lack of clarity on regulation, I think it's difficult for anyone to have a strong sense of what the path is for these companies.
Berkowitz in 2009: "...Or take American International Group. If you looked at an AIG annual report six or seven years ago, you saw one paragraph on derivatives. You look at an AIG annual report today and you see 15 pages on derivatives. I don't think company insiders fully understand what's going on, let alone outsiders. So if I don't understand something, I've learned to walk away." (http://www.kiplinger.com/magazine/archives/2009/01/bruce_berkowitz.html)
I didn't believe that Berkowitz was suddenly able to get clarity on an entity like this shortly after.
Also, on BoA:
http://www.zerohedge.com/article/85-bank-americas-net-income-comes-reserve-release-and-msr-adjustment-capitalization-ratios-p
I'm sure there are a number of managers who couldn't wait to get out of these stocks selling into whatever is causing today's pop. If you want to bet on the bank stocks, that's up to you, but again, I wouldn't bet heavily and keep it as a side bet.
I think it's far more important to learn about other global markets and what's going on in other parts of the world than the financials - I just think other markets are going to play a larger and larger role in the next decade - but that's just me.

As you know, Berkowitz's huge bet on financial institutions is what threw this fund and the new FAAFX fund into a tail spin. And it's not so much the the St. Joe's investment everyone talks about that was the killer, but it's larger holdings in AIG (which is it's biggest holding) along with Goldman Sachs and BofA and other banks.
That said, I don't think after a decade of great investing results, Berkowitz woke up stupid one day. I think he just made an ill-timed bet on financials, and with his focused investment style it cost him big time. He may have been way to early, but on the other hand, these stocks are looking pretty low right now. They could go lower, but at some point the financial sector will come back. This year, next year, who knows.
Anyway, if you are willing to take the risk as you said, this might be a good entry point, but you will be a contrarian to the heard jumping ship right now. I actually bought into his newer fund, FAAFX. I bought the manager, understanding every great manager has cold spells. I'm guessing he's early - not stupid - i hope :)
Good luck in your decision.

I'm brand new to investing (had 401K for 13 years, but never really researched or knew what I was doing before. My returns are the proof :-)). I've been spending a lot of time researching the past few months however and spending a lot of time on this site. It's been great reading. Today I was strongly considering opening a position on FAIRX. I've seen many discussions on this site about it and I see a lot of positives in the financial sector today, assuming based on recent financial earnings and with the whole US debt thing looking much more optimistic.
As far as future negatives, are there things I should consider that would hold me off from buying FAIRX right now? And I mean, I'm not concerned about our current environment. I see the US growing and specifically housing and financials for the long-term. But the things I don't understand are for instance the Europe debt issues, and is that or anything else, things that could overweigh the positive upside of financials and FAIRX?
If I do jump in, this is a position I expect to stay long on. I'm trying to build a strong core set of funds. At this point I'd be taking money from LEXCX and moving directly to opening the min. of $10K in FAIRX. If I continue to feel better about FAIRX, I can see myself adding more down the road. I also am thinking of increasing YACKX at some point and can see myslef building FAIRX & YACKX as the strongest weighted funds in my portfolio.
Again, I'm new to investing, and I feel like this would be a pretty big decision for me. I'm certainly willing to take on risk, as I'm fairly young at age 34, but just want to be smart about it.
Thanks in advance for any feedback.

Hi Guys,
Well is it the wisdom or the madness of the crowds? From a literary world perspective that would depend upon whether you are reading James Surwiecki’s “The Wisdom of the Crowds” or Charles MacKay’s “Extraordinary Popular Delusions and the Madness of the Crowds”. Probably both are representative of reality, partially dependent on history, on international tensions, on exogenous events, on endogenous happenings, and on personal perceptions, both real and imaginary.
We are surely susceptible to manias and bubbles, to fear and greed that shape our decision making. Since that’s the case, a reasonable extension of that observation is that the financial marketplace has no prospect of coming close to rational behavior. Maybe, maybe not.
We have all heard the axiom that “None of us are as smart as all of us”. That truism has been demonstrated many times over when expert panels with diverse backgrounds are assembled, and isolated from each other to retain freedom to think and act independently, to grapple with complex problems and issues that defy recognizable solutions. As a general outcome, the group’s average solution is superior to any individual’s preferred approach. I personally have participated on such panels and have shared the group’s success.
There is a very important distinction between a group’s opinion, and an individual’s proposal. The group can be more than the sum of its parts.
In his book “More Than We Know”, Michael Mauboussin explores this dilemma with a syllogism as follows:
“Humans are irrational
Markets are made up of humans
Markets are irrational.”
Given the validity of the two opening assertions, the third statement must decisively ensue. Even if the two assertions were absolute truths, which is not necessarily so since humans are rational some of the time and market decisions are sometimes completed with computer-driven tactics and trades, the concluding statement is not infallible.
Mauboussin summarizes his point with the succinct claim that “Markets can still be rational when investors are individually irrational”.
If there is sufficient independent analyses, goals, timeframes, and perspective interpretations, the diversity of the final judgments tend to cancel each other out. The market consensus can be far more accurate and perceptive than any single guru’s viewpoint. The herd gets it right until it becomes too uniform in its assessments and stampedes in the wealth destroying direction.
Mauboussin concludes his brief article with the observation that “The key to successful contrarian investing is focus on the folly of the many, not the few.”
One implementation difficulty of a contrarian’s style is to identify a reliable measure of the crowds average position. One candidate gauge is the American Association of Individual Investors (AAII) Sentiment Indicator. Tens of thousands of small investors volunteer in this statistically impressive survey. And it is updated weekly in the AAII website at:
http://www.aaii.com/sentimentsurvey
You may recall that I included the AAII Sentiment Indicator as one component in my six-factor Retirement Equity Assessment Model (REAM). The six components of the model are: (1) Fiscal, (2) Momentum, (3) Valuation, (4) Microeconomics, (5) Liquidity, and (6) Sentiment. I mostly included the AAII sentiment signal because of its exhaustive nature, its frequent updates, and its easy access.
However, how accurate is its opinions with regard to future market movements? Can it reliably indicate market future returns for the upcoming year? The AAII Sentiment Indicator survey has been conducted for many years; it has a track record. So it can be stress tested against future market returns like the S&P 500. That has been done.
Let’s examine its historical record as a forecasting predictor. Here are two excellent summary articles prepared by organizational AAII members themselves. I have provided Links to both of them. The first reference is a 2010 update of an original assessment published in 2004; the second reference is to the original study authored by Wayne Thorp. The 2010 update has imbedded the 2004 study in its entirety. I recommend you read the original paper because the plots are nicely integrated within the text so the reading is more easily completed.
http://www.aaii.com/journal/sentimentsurveyarticle
http://www.aaii.com/files/sentimentCIfeature.pdf
These references document the usefulness of the AAII Sentiment Indicator as a contrarian’s signal. Enjoy. Wayne Thorp concluded that “If you run with the herd, you might get trampled.”
I posted on this topic now because the AAII Sentiment Indicator has recently migrated into dangerous waters. I assess its current status as in my cautionary yellow zone. Although the current AAII Bullish sentiment is slightly above its historic average, it has not yet become sufficiently bullish to warrant an action.
Thorp’s paper suggests that a bullish signal of at least one standard deviation above its historic average needs to be registered before it is actionable as a contrarian’s sell signal. If you subscribe to that interpretation, then the AAII bullish sentiment must reach a level of about 50 % to deliver a contrarian’s sell signal. In preparation, the red flag has been unsheathed, but is not yet waving.
I do NOT dogmatically follow these signals; I use them in a guidance sense, and then only incrementally. Any mechanical rule should not replace common sense and should be deployed judiciously.
Most market wizards use a far more complex array of market signals when establishing their forecasts on market direction and portfolio asset allocations. James Stack, founder and chief designer of his InvesTech methods, has publicly acknowledged that he uses over 200 common and specially constructed signal generators. Each man chooses his own poison or his own poison concoction if he’s a more sophisticated market student (results will still be uncertain).
Because of my long standing distrust of all mechanical investment schemes, my incremental approach even after making an investment decision, and the marginal penetration of my AAII Sentiment Indicator, I have NOT taken any action with regard to my current portfolio asset allocations. That Indicator does bear careful monitoring because of its trending.
I wish you all continuing investment prosperity. But current market conditions demand constant vigilance. I am much worried over the entire globe’s financial status. Prompted by these concerns, I’m rereading Charles Kindleberger’s book “Manias, Panics, and Crashes”. It is not an easy task since it assumes the reader is familiar with distant and minor market crises.
However, Kindleberger’s classic does capture the significant characteristics of these disastrous historical events and parallels with current market conditions. It warns of the dangers of foreign contagion; it warns of inflation encouraged by excessive money supply growth; it warns of housing and equity bubbles that are promoted by unrestricted credit exposure. All these cautionary warnings seem applicable today; we are forewarned. So take care by taking prudent and controlled risks.
Best Regards.

Catch, if you can figure out anything in that portfolio, you should start on your "financial explainer" website. Apparently part of the cash equivalents (which, by some reckonings, are 60%) are "over-the-counter put swaptions" (which are different from their OTC put options) and TBA sales commitments on FNMA CMBS 30 years.
The complete portfolio is in the annual report at the BlackRock website and Morningstar. I tried linking directly to it, but the link is complex enough that it keeps erroring-out. Start at http://www2.blackrock.com/US/individual-investors/.
David

Can someone here recommend a mutual fund primarily investing in global dividend-paying
companies making 'real' products, while avoiding the financial ones? Most of my buy-and-hold
money is invested in balanced funds (Oakmark, FPA Crescent) and a smaller amount in riskier
plays (Fairholme, Oakmark global, Matthews funds). This fund will provide another leg to my portfolio.
Thanks for your thoughts and recommendations.

Reply to @fundalarm:
Hi fundalarm,
Here are the holdings of FDRXX: (Fidelity Cash Reserves)
Composition by Instrument (%) as of 06/30/2011
Treasury Debt 9.31
Government Agency Debt 0.89
Asset Backed Commercial Paper 0.26
Financial Company Commercial Paper 13.28
Other Commercial Paper 1.55
Certificates of Deposit 44.99 (FOREIGN BANKS)
Insurance Company Funding Agreements 0.15
Other Notes 4.88
Repurchase Agreements 23.28
Variable Rate Demand Notes 0.99
Other Municipal Debt 0.0
Investment Companies 0.0
Other Instruments 0.42
Take care,
Catch

Howdy,
No big chit-chat this week; and no buys or sells; as we are awaiting the unknowns from D.C. and how the market big kids react. It appears the bond traders are not too concerned as of yet, as the 30 year Treasury and other issue periods are maintaining; without yields moving to higher numbers. One may suppose that when looking around the globe and concerns of the U.S. debt pile, that the U.S. debt turd pile still smells the best of all the global debt turd piles (the other two best of the bunch would include German and Japanese debt). If you have not been downwind from any type of animal farm, I will assure you that given the choice among cattle, pigs or chickens; turd pile smells do indeed have a scale of best to worse. Such is life, eh?
The portfolio and a M* breakdown are below for your reference.
Take care of you and yours,
Catch
Not pure science numbers with this; but we hold 15 bond funds and equity funds with bond holdings; some being a much larger % of total holdings than others...but here are some rough numbers for combined yields:
---5 HY/HI funds avg. yield = 7.4%
---10 mixed/multi sector funds avg. yield = 4.5%
---All 15 bond funds avg. yield = 5.5%
The immediate below % of holdings are only determined by a "fund" name, the M* breaddown is at the end of this write; and a bit more realtistic, although with flaws, too.
CASH = 14.6%
Mixed bond funds = 78%
Equity funds = 7.4%
-Investment grade bond funds 12.2%
-Diversified bond funds 18.5%
-HY/HI bond funds 28.4%
-Total bond funds 14.6%
-Foreign EM/debt bond funds 4.3%
-U.S./Int'l equity/speciality funds 7.4%
This is our current list: (NOTE: I have added a speciality grouping below for a few of fund types)
---High Yield/High Income Bond funds
FAGIX Fid Capital & Income
SPHIX Fid High Income
FHIIX Fed High Income
DIHYX TransAmerica HY
DHOAX Delaware HY (front load waived)
---Total Bond funds
FTBFX Fid Total
PTTRX Pimco Total
---Investment Grade Bonds
DGCIX Delaware Corp. Bd
FBNDX Fid Invest Grade
OPBYX Oppenheimer Core Bond
---Global/Diversified Bonds
FSICX Fid Strategic Income
FNMIX Fid New Markets
DPFFX Delaware Diversified
TEGBX Templeton Global (load waived)
LSBDX Loomis Sayles
---Speciality Funds (sectors or mixed allocation)
FCVSX Fidelity Convertible Securities (bond/equity mix)
FRIFX Fidelity Real Estate Income (bond/equity mix)
FSAVX Fidelity Select Auto
FFGCX Fidelity Global Commodity
FDLSX Fidelity Select Leisure
FSAGX Fidelity Select Precious Metals
RNCOX RiverNorth Core Opportunity (bond/equity)
---Equity-Domestic/Foreign
CAMAX Cambiar Aggressive Value
FDVLX Fidelity Value
FSLVX Fidelity Lg. Cap Value
FLPSX Fidelity Low Price Stock
.......MORNINGSTAR PORTFOLIO VIEW below.......
Asset Class %
Cash 12.28
U.S. Stock 13.12
Foreign Stock 4.05
Bond 62.97
Other 7.58
Not Classified 0.00
Stock Style %
Large Value 11.01
Large Core 14.47
Large Growth 29.64
Mid-Cap Value 12.57
Mid-Cap Core 7.75
Mid-Cap Growth 7.60
Small Value 6.78
Small Core 4.67
Small Growth 5.40
Not Classified 0.10
Stock Sector Portfolio %
Cyclical 68.79
Basic Materials 5.51
Consumer Cyclical 58.36
Financial Services 2.89
Real Estate 2.03
Defensive 9.54
Consumer Defensive 5.51
Healthcare 3.75
Utilities 0.27
Sensitive 21.67
Communication Services 2.57
Energy 7.45
Industrials 3.59
Technology 8.06
Not Classified 0.00
Stock Type Portfolio % VS S&P 500
High Yield 0.11 0.23
Distressed 3.57 0.67
Hard Assets 6.91 13.29
Cyclical 69.64 43.93
Slow Growth 5.14 14.80
Classic Growth 0.75 6.73
Aggressive Growth 5.52 16.15
Speculative Growth 0.87 1.98
Not Classified 7.50 2.22
Fees & Expenses Average Mutual Fund Expense Ratio (%) 0.75
World Regions %
North America 61.02
UK/Western Europe 4.20
Japan 0.87
Latin America 2.33
Asia ex-Japan 1.83
Other 0.30
Not Classified 29.45 (AAARRRGGGHHH !!!!!)
Stock Stats Average for This Portfolio Relative to S&P 500 (1.00=S&P)
Price/Earnings Forward 14.46 1.03
Price/Book Ratio 2.14 1.02
Return on Asset (ROA) 7.74 0.91
Return on Equity (ROE) 18.47 0.88
Project Earnings Growth-5 Yr (%) 12.77 1.29
Yield (%) 4.38 2.58
Avg Market Capitalization ($ mil) 10,260.29 0.20
Bond Style %
High-Quality Short-Term 0.00
High-Quality Intermed-Term 0.00
High-Quality Long-Term 0.00
Medium-Quality Short-Term 3.53
Medium-Quality Intermed-Term 14.77
Medium-Quality Long-Term 0.00
Low-Quality Short-Term 16.10
Low-Quality Intermed-Term 33.45
Low-Quality Long-Term 5.28
Not Classified 26.88 (AAARRRGGGHHH !!!!!)

Hi Jakem,
Welcome to the skeptical, suspicious, and sarcastic Mean Street within MFO.
Probably not surprisingly, you will get very little succor from these quarters.
You seek the investor’s vision of the Holy Grail. It is a commonly unfulfilled quest. The Holy Grail is so illusive because it is an illusion whose form varies in the mind of each seeker. The seekers themselves are a motley mob composed of many True Believers, but also many fakers, snake-oil salesmen, and charlatans. It has been that way for decades, no, more like for centuries.
You said: “A current client has launched a series of mutual funds whose strategies aim to minimize losses by exiting markets prior to deep declines while maintaining material participation in up markets. The investment process is quantitative and looks exclusively at price movement to derive an in or out of market signal.”
That’s the easily recognized signature of momentum investing. Many market wizards like John Bogle challenge its validity. So do I.
I will first rant from a sarcastic perspective; I promise that if you persist to the end, I will provide some useful website addresses that might satisfy your needs.
Market Timers have been searching for the signals that would identify floors and ceilings forever. They probably have deployed every metric ever conceived, grouped the metrics into a dazzling array of composite metrics, and invented their own sets to impress the uninitiated public. If this vast array of timing and technical tools ever worked, they worked unevenly, sometimes benefiting the True Believer, but often giving false signals that crash hope in the process.
Unfortunately modern investment theory with its statistical emphasis on metrics like Alpha (excess returns), Beta (sensitivity to market direction and magnitude), Standard Deviation (volatility), Gaussian distributions (a rough approximation that ignores “fat-tails”), the Sharpe Ratio (measures the reward to risk ratio), and the Sortino number (measures the downside reward/risk sensitivity) give investment amateurs and professionals alike a false sense of an absolute science.
While useful in the decision making process this statistical maelstrom is not the end all. Investing is not entirely a science and never could be because of the uncertainties in forecasting future events and outcomes. Solid investing decision making is based on some mixture of knowledge, mathematics, money discipline, patience, art, and luck elements. In that sense, the Holy Grail is a myth.
And the speed, power, and ubiquitous presence of computers and communications networks has further exacerbated this situation. Every purveyor of investment products offers technical tools coupled to wonderful graphics, and makes this bewildering assortment of tools accessible to his customers. Customers beware false gifts.
I guess some adventurous entrepreneur feels the urge to add to the 10,000 plus schemes for a momentum-based strategy that presently exist, or in your case, how to sell those schemes to potential customers.
I suppose we should reassess the robustness of newly minted, infallible technical signals based on a Fibonacci number sequence, or an Elliot wave analysis, or a Kondratieff long wave interpretation, or an astrological observation, or perhaps a simple bone tossing exercise. The options and opportunities are nearly endless. Of course, the historical record of these mechanical theories are less then comforting. Any evidence of their successes are mostly fictions invented by its promoters.
There certainly is data that supports a momentum factor contribution to total market returns. Academic Mark Carhart reported that finding in research papers published in the 1990s. His findings expanded the Fama and French 3-factor model into a 4-factor model that incorporated the momentum effect into mutual fund persistence analysis.
However, the momentum factor usually contributed only a small increment to a portfolio’s return. Also it had short duration. It seldom persisted for more then one year, although in some instances it did show a residual impact for up to two years.
There is no logical rationale explanation for any of the numerous momentum strategies. They lack a causal/effect relationship and seem to be the product of excessive data mining. Those outfits that really do apply momentum methods usually integrate them with more fundamentally inspired approaches.
But, to each his own.
Does the outfit that you represent have a scheme that employs a mix of technical parameters and/or charting tools? Or are you seeking a set of criteria to serve as a basis for a yet to be derived set of rules? Are you planning to plan?
From my vantage point, all this falls into the data mining category. That form of research has produced major disasters. Recall the studies that James O’Shaughnessy completed and published in his book “What Works on Wall Street”. That book was given the Best Investment Book award in 1996 by the Stock Trader’s Almanac. The mutual fund that emerged from that data mining exercise soon failed. Most of these technical studies are quickly consigned to the investment scrap heap of history.
In conclusion, I am dubious about your project and I doubt its prospects.
That ends my skeptical and sarcastic commentary. As promised, I finish with some references that might benefit your quest.
The MoneyShow offers access to financial money manager’s preferences of all persuasions, including many momentum oriented professionals. Here is their website address.
http://www.moneyshow.com/
The CXO Advisory Group maintains an extensive performance record of investment gurus. Here is their website address.
http://www.cxoadvisory.com/
The Stock Trader’s Almanac is another candidate resource for your purposes. Here is their website address.
http://www.stocktradersalmanac.com/sta/home.do
Many members on the defunct FundAlarm website respected the momentum predictions made by Pony Express Bob. Here is his website address.
http://customer.wcta.net/roberty/
Market wizard’s performance records are also maintained at the Guru Focus website. Here is its address.
http://www.gurufocus.com/
The most comprehensive website that provides free technical analysis descriptions is operated by Thomas Bulkowski. He claims impressive success. His address is as follows.
http://www.thepatternsite.com/
Thank you for allowing me to rant on this subject. I hope the rants and the closing references will help you just a little.
Although I am not a protagonist for market timing methods, I wish you and your employers success to reward your efforts.
Best regards.