That Was The Week That Was-5th Week August

Stock Overlap is Something Mutual Fund Families Don’t Like to Advertise! Last week I reported to you that Morgan Stanley has a lot- a real lot- of Facebook stock and has spread that stock over many different mutual funds that the firm manages. It doesn’t matter if the mutual fund style is foreign, global or large cap growth MS managers parceled out Facebook stock like M&Ms in trail mix. The firm owns so much of Facebook that it has it among a dozen of its funds. That’s what’s called stock overlap -when several funds you own own the same stock. So if you are a Morgan Stanley mutual fund aficionado and designed an asset allocation portfolio out of their funds you’d end up with lots – probably more than you wanted- of stock in Facebook.  And MS isn’t the only fund family to report that they are investing one stock into a variety of different  funds they manage. Morningstar reported that the American Funds had a 38% stock overlap between its funds.  You could own a small cap and large cap and still find yourself owning a goodly percentage of the same stocks. This would be like ordering a steak and a shrimp dinner and getting your steak plus lots of shrimp on one plate and then the same on another. You get what you ordered and then get it again where you don’t want it. Some fund families would brag how they kept transaction costs down by buying trainloads of one stock. What they didn’t finish saying was that all their funds got some of the same stock in their portfolios. The Wizards of Wall Street misdirect investors by telling them to rebalance and make sure they asset allocate but these activities don’t help if you own a variety of funds that own the same stock. You can’t asset allocate owning the same thing. It’s the apples and oranges thing. Someone ordered too many apples and so everyone gets them whether they want them or not.  The reason for this crisis of overlap is that there is more mutual funds and ETFs than there are stocks to buy. So if your telecom manager is going to buy the best of breed for the growth fund the manager at the small cap fund may take his extra dollars and sop up the same stock. Some overlap is almost impossible to get away from-but investors have to understand what they own and why things go up and down at the same time. If you don’t have a calculator that can determine what the overlap is on what you own then call me and I’ll have a portfolio x-ray of your funds and illustrate exactly what’s what.

 

These are the Rock Stars of Investing: Warren Buffett, George (Icky) Soros, David Einhorn, Seth Klarman & Bill Ackman, according to MarketWatch’s Matt Andrejczak ( he didn’t label George Soros as Icky I did).  Matt wrote last week that these iconic money managers have bought ‘winners’ in 2012 and the rest of us may well pay attention and follow their lead. Buffett bought Wells Fargo, Bank of NY Mellon, General Motors (at its low). Soros bought Wal-Mart and GE. Klarman bought Oracle in the 2nd quarter for about a 20% gain so far. Einhorn bought Coventry and Cigna Health Care. Bill Ackman bought Proctor and Gamble and so far is even with the board. P&G he told investors has so far disappointed.

Royalty Trusts slowly sinking…?  Jason Zweig reported that Royalty Trusts (there are 30 of them), have seen yields decreased and stock shares fall. Current yields are still a lip smacking 6%-8%. Most investors don’t know what a Royalty Trust is but buy them for their eye-popping yield. Royalty Trusts own nothing, manufacture nothing, have no employees except for someone in an office who collects the money, manages the books and sends out distributions. What they do own is the right to the income from mining or energy properties. These are not to be confused with Master Limited Partnerships. Royalty Trusts cannot add new properties and when the income is depleted from what they own the Trust is kaput. Since there is little action in the actual stocks of Royalty Trusts old poops like them for their lack of volatility. What they don’t know is that the Trust’s actual value is slowing sinking while investors bid up the value. For example BP Prudhoe Bay Royalty Trust has a current liquidation value of $1.4 billion but its market value is $2.3 billion.  In other words investors have bid up the value far more income than they will ever get from the company. They just don’t know it! If you have seniors that are thinking of buying or have bought these Trusts start looking at exit strategies before values move even lower. There are values in other asset classes that are easier on the nerves. (and wallet!)

In December 2006 I was doing my radio show when HERTZ went public. The stock didn’t make a big splash and everyone yawned saying that the organizers were taking too big of a bite and leaving nothing on the table. Shares opened around $15.00 and promptly sank. Today shares are around $13.00 and the company has bid and won Dollar Thrifty Automotive Group. Hertz now owns both Dollar & Thrifty and operates them as separate entities. The industry has consolidated from nine players to only three. Still many investors don’t see value as rental rates have fallen over the past decade. Still Hertz stock was a big mover this past week.

  Mitch Tuchman on the #1 Reason Why Small Investors Are On The Sidelines.  The Tuchman was commenting on the reporting of 10 reasons from Barry Rithotz of the Washington Post Ritholtzs. Barry wrote that one reason why the retail investor has buried their money in a Mason jar under the front stoop was because of poor returns across all asset classes. Responding that Ritholtz was wrong on at least this one point The Tuchman, writing for MarketWatch.com, illustrated the following chart:

Certainly investors have benefited from Bonds over the past decade along with diversified growth.

 

Some Investors Have Bailed Because of Lack of Confidence of Elected Leaders. Fear of another Market Meltdown or Flash Crash- another worry investors have to stay on the sidelines. While many investors voice likeability for the President concerns about his leadership have kept the retail investor from diving back into the markets. I just received a brochure from the Franklin Templeton folks on investment reality versus investor perception- anyone who wants a copy has only to send an email or call and ask.

Index investing is simply owning stocks that make up an index. The fund or ETF doesn’t do anything but lay there. Active fund investing is allowing the fund manager to make adjustments and buy and sell stuff. Ian Salisbury @ Dow Jones writes…’The whole point of buying an actively run mutual funds is that a …. manager has a better chance of sussing out a great investment opportunity.’ But Salisbury reports that several smaller funds have opted to simply dump their investor money into an index ETF, collect a fee plus pay the ETF fee, after passing that on to the investor and call it a day. Who, you ask, would do such a deed? Well, seems the good folk at AMERIPRISE FINANCIAL which used to be  called AMERICAN EXPRESS FINANCIAL and before that IDS, or Investor Diversified Services.  They bought the Columbia Fund Family from Bank of America and their Columbia Small Cap Core Fund is fully invested in the iShares Russell ETF – which tracks the small cap sector. According to Salisbury dozens of other funds have done the same although not all to the extent of Columbia. Investors are urged to know what their managers are buying and how they are investing their money. What a business! What a country! Now all you need is have someone hand you money, you turn it over to an index fund, charge a fee on top of their fee and send four statements a year telling investors how well they’ve done- or not. And, you get paid for doing NOTHING!

 

Someone told me eons ago that Asian manufacturers made great products but were not very skilled at the design or imagination part of the business.   What they point to is Asian autos where the front resembles a Mercedes and the rear a Buick. They copy what they like best. True or not it seems, after the big Apple win, Asian phone makers, according to the WSJ, face a setback, of sorts. While copying may be the bestest form of adoration it is a no-no in business. Apple may just gear up and go after other Android players after last week’s win. According to last week’s WSJ those manufacturers are HTC, Corp., Lenovo Group, ZTE Corp., Huawei Technology Cp and LG Electronics.  Investors best check what they own or what their fund managers are holding. Semi-conductors seem to move from October to March and then slack off. On Thursday Tokyo judges said ‘surprise’ Samsung did nothing wrong!

I am keeping an eye-peeled on Gold and Silver. And I’m not the only one. Bullion is trading, according to Mark Hulbert, $250 less an ounce than it was a year ago. Hulbert reports that investor bullishness has gotten ahead of the real gold rally. Sentiment may only work for short term rally so expect some sort of a pullback before metals take off.

Who doesn’t like Rice Pudding?  I like the homemade kind- not too sweet with bits of raisin and nuts. In New York there are places that specialize in only serving rice pudding. There are other specialty shops, of course, like cup cake stores and soup shops. Now a former equity research assistant with JP Morgan Chase has opened the first Oatmeal Shoppe in NY City. Her store front offers up a variety of sweet and savory porridge. Business, according to her, is going very well, indeed. This is the kind of a story that warms the cockles of the heart….with blueberries and brown sugar…Small stores for malls appears to be the future, as reported in WSJ last week. Maybe for downtown and Main Street, too. Which is the reason for this piece as I was reading Mall Managers are having problems filling space with big anchors and soon maybe we’ll see Ms Porridge and the Soup Nazi coming to a mall near us. Mall REITS have done rather well so far this year with double digit returns.

Jack Hough Blogged that maybe retail investors (that’s you, me and the candle stick maker) should follow the herd a bit closer in his August 25th epistle. Equities, especially the S&P 500 index, has done very well this year and while some investors have moved assets from the S&P they have not buried it under the stoop. Seems the record shows investors have added foreign and balanced funds to their portfolio mix.  While I can understand and appreciate large cap foreign stocks I wonder if maybe it is too early. The balanced portfolio is a combination of stocks and bonds and the folks at Vanguard suggest that maybe investors use a mix of 60/40, 50/50 and 40/60. Of course investors can always buy individual bonds, bond funds or other instruments rather than using the one fund does everything approach. Buying fixed in other forms accomplishes the same thing but gives the investor greater flexibility.

Andrea Coombs reports that half of all U.S. retirees die with $10,000 or less. Single retirees die with even less. But, she goes on musing that while this number is depressing it’s not as bad as all that. An MIT professor ( you knew that there was one behind this somewhere, didn’t you?) James Poterba, professor of economics, said just because the cash was low didn’t mean that the retiree’s standard of living was low. There was social security or pension income that allowed financial resiliency. While I have no clue as to the real reason the study was made it did have a conclusion that those with more money lived longer. Which I guess is reason enough for all of us to hang on.

Time to Romnify Your Investments? Bill Gunderson @ Dow Jones thinks some smart people are doing just that. Green will go the way of wide men’s ties as Solar and Wind will be back-shelved and oil derricks will bloom across the landscape like dandelions in my neighbor’s backyard. The Mitt, according to Gunderson, is a proponent of , ‘drill, baby, drill.’ Oil service and oil drillers will make significant moves, some already. Cannot be too early for investors to start peeking at best of breed.

 

54.5 mpg or about 40% higher mileage in the year 2025 is what the new mileage standards will be. Fortunately the government will grade on the curve which allows the 90 mpg electric cars to boost the average. Which brings me t0 the new model preview of 2025…

Quick name an economy that’s growing at over 5% a year and it isn’t China? 

 

This makes the Philippines the fourth fastest growing Asian country behind China, Indonesia and Sri Lanka ( I have no idea where Sri Lanka is let alone what’s boosting its economy). Opportunities in emerging markets funds that invest in Asian markets still have plenty of growth ahead of them as Europe sputters and tries to recover. Many advisors look at emerging markets as a core holding.

I remember & miss Gavel to Gavel Coverage of Political Conventions. It was great theater back in the day as news reports from the floor bickering to the outside agitators in 1968 Chicago were brought right into our family room. My grandkids are missing a great education in the real political world!

Markets Fell Ugly on Thursday- A day before The Ben Bernanke speaks from Jackson Hole conference Friday at 10 AM.  Anticipation of a lifeline for the final quarter or more ‘wait and see and we’ll be there if you need us’-rhetoric is being tossed about from CNBC to Dow Jones. No one knows for sure. Some anticipate that he’ll say that the politicians should get in gear and simply do their job. Global markets are also paying attention to the serious business of our domestic economy. If there is some positive comments from the Fed chief you’ll see market reaction on Friday and Tuesday.

Finally- Have a safe Labor Day. And hoping for much better Labor Days a-coming!

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money. Attend the coming fixed income meeting if you can’t tell the difference between a dividend and an interest payments.