Quick Apology

Yes, I've been out of it. No, I have no excuse. Don't need one. Its called life. I can happily report that I have successfully moved most of my personal belongings into my new, $416/month cheaper, apartment. There will be more discussion of this in the near future, and its impact on my overall finances. I may also finish my July update, as a few surprises popped up recently which modified the picture but not in an overwhelming way. Or I may just continue forward with the August snapshot. Who knows!?!?

Anyway, I will write again soon. Now, its time to go home, where I have no Internet connectivity, to read documentation and source code for the FIX protocol and watch the end of "Wall Street". (There will be a review coming as well. I've seen the damn movie too many times to not analyze it on this blog.) Depending on how much this caffeine continues powering me, I may work on valuing some multi-unit properties I'm considering putting an offer in on. We'll see!

Cheers!

A Response to Teresa Lo

If you've been following things around here for a while, you'll recall that back in April I wrote a post which was effusive in its praise for Teresa Lo's series on building your own investment portfolio. Little did I know that Teresa would comment on that very post. I was honored.

In her comment, she asked me

Now that you've decided to reduce the number of asset classes, I was wondering how you plan to allocate the funds? Do you use a certain formula?

to which I had no response at the time. There were some other matters that had my attention, so I never really gave the question extensive thought. What I did know was that I liked the satellite portfolio that Teresa describes in the series. So much so that I planned to copy it outright. (What was that about great artists stealing?) While I would imagine that any portfolio that InvivoAnalytics constructs for a client would have slightly different components, the overall idea and simplicity of this portfolio is ideal. I know that I have too many components to my current portfolio, and while I like them all, there has to be a better way.

First, I have liquidated all the holdings in my taxable account. As I've previously stated, I use the aggressive allocation from 401khelp.com for my 401(k). So this interpretation of the satellite portfolio will truly be the "explore" portion of my overall investment holdings, while the "core" remains in my 401(k).

So, to answer the question, I return to the original inquisitor...I have purchased a subscription to InvivoAnalytics.com's Portfolio Strategy service!

Now, this may seem like a cop out, but I considered the following factors. First, I was planning to use the same investments anyway. Two, Teresa and Pete have put in the time and effort to come up with the algos to perform the asset allocation, rebalancing, and other processes which I would otherwise have to implement manually, and their processes are targeted at the same ETFs. Third, I'm busy. I am working on several projects outside of my investing, some of which I've talked about on this blog. There is just not enough time, and consequently not enough value I could add with the time available, to make the investment pay off. The work has already been done, so I should use it. Fourth, I didn't have to pay directly out of my pocket; I was able to pay with blog earnings. Its a minor point, but anything that reduces the friction in this kind of decision is "A Good Thing".

So Teresa, I think you already know the answer to the question by now.

That said, here's the breakdown from Monday:

• VXF - 16.88%
• EEM - 14.18%
• GSG - 9.92%
• FXF - 28.13%
• TLT - 30.89%

Now, some things to keep in mind before anyone rushes off to implement this allocation. First, these are the allocations from InvivoAnalytics.com's Strategic Performance Portfolio. They are designed to be implemented in a trading account, since they rebalance the allocations weekly. Thus, you'll want to reduce your friction as much as possible.

Also keep in mind that these are not core retirement portfolio holdings and allocations. InvivoAnalytics.com has services for a core portfolio which is designed to be implemented within your primary retirement account, primarily targeted at 401(k)s. As I have mentioned before, I use the aggressive asset allocation from 401khelp.com in my 401(k), with a few tweaks for a more defensive posture in this market (primarily, more international exposure for a greater risk/return profile, more cash, so I have some dry powder, and less real estate exposure for obvious reasons). If you're looking for a core 401(k) asset allocation from Invivo, the Strategic Performance Portfolio is NOT it.

Part 8 of Building You Investment Portfolio discusses some of the details of how the dynamic algorithm works (at a high level).

(Yes, those numbers change every week, so while you're getting a free ride for this past Monday, by next Monday the numbers will be different. You shouldn't buy in the middle of the week anyway, but wait until the next allocations come out next Monday. However, you have to be a subscriber to find out what those will be!)

So all of that said, thank you again Teresa for coming up with these model portfolios and giving me time back to generate alpha in other ways!

Until next time...

Crazy Random Thought

Given that the stimulus checks have mostly flowed through the system, into people's gas tanks and back to the Middle East, AND that consumers are still hurting, it would be interesting to see what impact is had by the delay. I mean, how much time did those checks buy?

It would be interesting if the real contraction, put off by the stimulus package, starts close enough (but before) the November election to have an impact on the outcome. Will energy markets have calmed down enough by then to reduce the possible pain on the McCain camp (by virtue of his association, however loose, with the sitting President)? Will the run-up to winter combined with increasing unemployment, leading up to the election, favor Obama? Where is the Black Swan?

Just something that came to mind as I prepare to go to sleep for a few hours.

Later, my peoples!

Apologies

I have to apologize to all of the readers of this blog. My connectivity at home has been crappy for the past few weeks, and I haven't had time to troubleshoot it. Considering that I am moving out of my current residence by the end of the month, it really hasn't been high on the priority list to do so. Finding connectivity outside of the home is also troublesome because I'm often on the move and for some reason, in places where I don't have connectivity or I'm not staying long enough to utilize it.

(Don't even get me started on the matter of using connectivity at work. That's more than enough trouble as-is.)

I'm actually preparing some posts about my final July net worth and financials, including my (so far) thwarted attempts at adding options trading to my brokerage account, and a few thoughts on the general economy. So I'm still here, but to paraphrase Gertrude Stein, there's no here here.

Thanks for hanging in there. I'll work on being more communicative about all issues in the future.

Beautiful Day

So I just ran the preliminary numbers for July and things look good. Entertainment kicked me in the ass, but I saw more movies this month than in the entire rest of the year combined. Add in the costs for Projekt Revolution, and I took a big L in this category. However, not all is bad. My calculations are based on a rent payment of $2150 (even though my portion is only $1650; the rest is paid by my roommate). So if we consider that I spent $229.91 on entertainment this month, and subtract out the $500 difference between my rent charge on my credit card and my actual portion, we find that I am really up $270.09.

Not too shabby.

As well, running calculations for my food expenses (overshot my budget of $600 by $48.38 although some of that probably should fall under entertainment), medical expenses (only charged $14.10 against a budget of $75) and fuel expenses (charged $257.84 against a budget of $700) yields a savings of $454.68. That figure includes subtracting out the food overage from the medical and transportation budget savings. This amount has now been transferred to my emergency account, for use on my trip to Trinidad for Carnival next year. I think I've covered over 50% of the expected expenses for that trip in the last 2 months of savings. Its a very nice feeling.

I'll have more on this later, but right now, I'm off to the movies. :)

Cheers!

Regrettable Comments by Bank CEOs

How rich! Pure comedy, I swear. I don't often link to Portfolio, but this one is worth a mention just for the humor factor.

New Private Racetrack in NY

I saw this and almost started crying. Just to be able to spend a day racing at this club would be a phenomenal experience. Of course, I imagine its Bring Your Own Supercar (BYOS) even at a daily pass rate of $2500. Since I happen to be short of the supercar, I guess I'll just have to read the news coverage, if any.

Analyst Arbitrage

Well, not exactly, but it sounded good. :)

Seriously though, I was reading this piece in the SJ Mercury News about Frank Quattrone's return to technology finance, and something that Frank was reported to have said caught my attention. Here's the paragraph from the article:

But the result has been that a large number of analysts have left investment banks to join hedge funds and private equity firms, Quattrone said. The remaining analysts have focused on covering bigger corporations, rather than small start-ups, because there's no money and little recognition in covering the smaller companies, he said.

At first blush, you may agree with Frank. However, that analysis is counter intuitive to me. While what Frank said here may be true (I don't know), it appears to me to offer an opportunity for someone to profit. See, if there is less analyst coverage of smaller tech firms (especially those with real businesses, revenues and profits), then a studious operator can use the lack of coverage to their advantage.

Every trader, portfolio manager, or even small investor, is looking for an edge. The analyst rules implemented in the wake of the Blodget and Grubman scandals create a vacuum of public information around small companies, according to Frank. So the operator who is peering into the cracks, doing the due diligence, and sniffing out the promising companies that have minimal or no analyst coverage, has a better chance of finding a "hit" before the market does. Its a perfect arbitrage play. Of course it takes courage to do, but isn't that the point? The successful operators feel fear like everyone else, but they don't let that fear stop them from making good, well reasoned investments (or trades). So the operator that steps into this information void, spends the time learning about the company, and generates an investment thesis for it is taking a huge risk. However, that risk is mitigated somewhat by the fact that s/he's got a larger margin of safety to work with while the stock is undiscovered.

None of this means that our hypothetical operator can't be wrong. The investment thesis could be bogus. The timing could be sub-optimal. Any number of things can go wrong; that is the risk of the market. However, finding an unloved gem is the kind of investment everyone wants to make. So analysts' failures to cover these small companies creates an opening for the intelligent and courageous operator to profit handsomely. Shouldn't we be glad that these information arbitrage opportunities are being created? If we are the competent and capable operator, we should be giving thanks and showing gratitude for such situations, so I would think.

I don't feel bad for the sell-side analysts. If their work is any good, they'll get known for it. Meredith Whitney and Dick Bove come to mind. The good analysts will have options. Hell, even the less-than-best analysts will probably land on their feet too, usually within a hedge fund or private equity firm, as Quattrone acknowledges, or some other buy-side entity. The analysts creating forgettable research will fade into obscurity within their firms, and the typical retail investor will probably place (misguided) value in/on their work. I don't see how life is so bad for our sell-side analyst. Will it be as easy as it was during the go-go 90s? No. Will it orders of magnitude harder for them to make a living? I doubt.

Its too easy to tag along on the words of the great Frank Quattrone, given his reputation and past success. I think Frank misses the mark on this one, though. However, Frank wasn't a trader. He was a banker. As such, he probably never had to consider this issue too closely. In Frank's world, the sell-side coverage was probably proof that he was doing his job (and well). It probably justified the expense that the IPOing startup went through to work with Quattrone and his gang at CSFB. All of this would serve to burnish Frank's reputation as the go-to banker, which made him more prized and valued by whichever firm employed him.

I don't know if he's just looking at this void through the eyes of a banker, or if he has really evaluated the pros and cons of the reduction in sell-side coverage for smaller stocks (across industries, but especially in technology). I hope he has, and that he saw something I missed. In that case, I would LOVE to know what I overlooked. However, I don't get the feeling, from reading this (very) short article, that he did that evaluation.

Until next time, good people...

Covered Bonds and Bank Failure

So does anyone REALLY know what happens to covered bonds if their issuing bank defaults? I ask because based on the brief description from Bloomberg.com, Wikipedia, and the European Covered Bond Council, it sounds like a securitization that has to stay on the books of the issuer. Now, if the issuer fails, what happens to the bonds? I mean, it sounds like they are already overcollateralized, which is how they get the superior ratings, but I haven't seen any mention of the outcome of issuer failure. Maybe I just need to read a bit more.

However, these things sound pretty attractive so far, if you can look past the fact that a NRSRO had to issue the rating on the bond. As we know, until recently, the 2 NRSROs that the market listened to most closely were Moody's and Standard & Poor's. Their collective track record on ratings isn't exactly spotless. Still, these covered bonds that are already trading (not necessarily those of FNM and FRE, should they actually come into being) sound promising based on their yields. I sense a lot of fear around these things, just based on the the names of the issuers, and that indicates a potential opportunity to me.

At times like this, I wish I had access to a Bloomberg!

Financial IQ Test Score

64.

That's including the bonus point. Not nearly as good as I thought, but it shows me what I need to work on. Credit/debt, shopping, and financial planning would appear to be my weak points. Time to get to work, it is.

I encourage everyone to roll on over to Moolanomy and take the test. I printed it out to make it easier to record my results next to each question. Do whatever works for you, but then turn that knowledge into action!

Until next time...

Trading Up

Well, it took me forever and a bloody day, but I finally got my options application in to the mail today. Yay me! We'll see whether I get approved. Cross your fingers. Since I don't plan to write any options, and especially not puts, I think it should be ok.

I'm also looking to lighten up some of my funds today or tomorrow. We'll see how things look near the close. I plan to close out my TREMX, PRMSX and RPIBX, as I prepare to trade into Teresa Lo's satellite portfolio (with a few minor differences).

Anyway, more on this to come. I need to go sleep!

Thoughts of IndyMac

This is exactly why I scoffed and avoided any bank offering a rate greater than the rate HSBC has been offering for their online savings accounts. It was pure asset gathering, as these institutions, in their race to the bottom, were trying to generate enough lendable capital to generate enough revenue to offset the risk of failure. As if there was enough time for such machinations to work! E*Trade Bank and Capital One come to mind as well, along with IndyMac.

Eurozone Birthrates

I'm not an economist, and I'm thankful for that, but this just makes me think that the eurozone has MUCH bigger problems than the ECB's monetary policy. I mean, they're pretty fscked anyway with the collapse of credit and housing markets in their most dynamic economies (never mind what's happened to everyone else -- German banks?). I wonder if they can pull off the trick of getting their economies to slow down faster than their birthrates?

I guess I should just be glad I'm where I am. Barely.

Damn You Japan!

Sold off SPXJX at $14 yesterday. Good riddance!

Preliminary June Analysis

Since I had some time before going to sleep, I figured I'd try to throw together some quick and dirty reports about June's financial performance. So far, things look good. I spent $405.84 on food, when my budget allows for $600. I spent $201.04 on gas, which is WAY beneath my ceiling of $794.62. If not for the Misc category, which blew a complete hole in my numbers, things would look great. Add to that the fact that I will be moving next month, so by September my rent will drop from $1650 per month to $1234 for my own 2 bed/1 bath apartment, and I'd say things are in excellent shape.

Anyway, I plan to work with the numbers a bit more and get a better idea on what worked and what didn't. My new diet seems to have had a very positive impact on my finances, if I had to take a guess from these numbers. I front load carbohydrates and finish the day with a salad. Even with a pre-packaged salad, I'm not loading up on sugar-laden food which becomes fat while I sleep. Those pre-packaged salads cost only a few dollars as well, so I can buy a bunch of them for work and still leave room in my budget for eating out the rest of the week (if I choose). Sweet!

Anymore, more to come. Until next time...

Heads Up

I know I've been off my game recently. However, I do have a new update coming soon. Now that the first half is done, its time for a quarterly wrap up and some other activities. Also, there is a big position sale in my future. Gotta love tax loss selling! I don't see Japan going anywhere significant anytime soon, so...

Stay tuned!

Separation of Powers

I have started a new blog called "What De Rass?" This is where you'll be able to find my personal ramblings. All finance oriented chatter will stay here, but I'll move the bulk of my non-finance related postings over there. Things seem cleaner that way.

Those of you who come here probably don't give a damn about my life or what goes on inside my head beyond the conversations about finance, money and alpha (when they break out). Thats all good and fine, and this is the place that you'll stay. For those of you who harbor any interest in me beyond finance and my take on it, feel free to check out "What De Rass?" and even let me know what you think.

Have a good day, all!

Silver Lining

It looks like Mexico might have some medication for the real estate woes in Texas.

You have to admit, that's pretty funny. Mexico, of all basket case economies, has enough liquidity flowing through its veins to stanch the bleeding here. There are so many things racing through my head -- humor among them -- as I think about this.

What I Want...

...is a short play on social networking. How many fuggin' social networking sites do we need? I know I sure don't need that many, and I probably need more than the average human. (Not as many as Kedrosky, but more than average. THAT dude needs his own personal social network.)

I wish there were a nice index I could short, but none of these fuggin' sites is public (and most probably have no chance of ever being public). In fact, fugg a short. Just buy puts on the index. I need a derivative contract.

Hi5? Facebook? LinkedIn? Friendster? Ok, ok, ok. I'm good. I don't need Multiply or MyYearBook or whatever the hell other social networks are lurking out there. Fuggggg man, just leave it alone already!

One of my students asked me about his idea for a social network the other day. I went on a rant about the business, basically telling him that he'd be better off doing it as a hobby unless he had a clear business case and heartless, soulless dedication to that objective. (As Gekko said, if you need a friend, get a dog.) I sure hope he doesn't go through with it. Talk about a waste of talent and time.

Stop with the social networks, please, for the love of God and all that holy!

Does Not Compute

Something about Felix's argument doesn't compute, but my brain is a bit too cloudy to take this on right now. I need some sleep.

Yes, credit enhancement has generally been the name of the game with muni issuers and monolines. The issuers were trying to get their issuance costs down (e.g. their yields), knowing full well that the primary buyers of their product were likely not going to spend a lot of time doing credit analysis. Even doing 1 issue would be problematic for a small investor, never mind the universe of muni credits in the marketplace. Guys like Tom make a lot of money (and spend a lot of time) doing that research. People like me, however? Not so much.

So what am I missing here? Yes, credit enhancement in an era of diminished trust in the ratings agencies is probably absurd. However, you have to play to your audience. The rating agency problem will, hopefully, start getting sorted out with new entrants to the market. I don't see this world changing drastically.

Of course its nuts that munis, with their historical default rates, were not being compared evenly with corporate credits. However, I think your state treasurer probably was working with a small budget, and any way to shave a few hundred thousand in coupon payments annually was (and is) significant. All of those costs (and savings) flow directly to the bottom line.

In the longer run, the market will likely morph. Higher quality credits will probably go without insurance. Lower quality issues will probably still seek it out. I doubt the market will disappear, but shrinkage seems highly likely to me. For these issuers, making those costs evaporate is probably the key reason for the demand for insurance. Now, I may be missing something from my limited vantage point. Please, someone, clue me in if I have missed something. Basically, I think Felix is being a bit too cynical on this one. Ratings arbitrage occurs, sure, but I think the primary motivator for many of these treasurers is keeping their costs low. For a relatively small outlay (especially for larger issuers), they could get that, with the higher rating being gravy (an effect rather than a cause).

Does that make sense to anyone other than me? I hope it does. Maybe I'll expound on this after I get some rest.

Until then, dear readers...insurance - don't leave home without it!