Archive for June 2010
28
The Japanese Stock Market: How to Play “The Land of Rising Stocks”
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The Japanese Stock Market: How to Play “The Land of Rising Stocks”
by Alexander Green, Chief Investment Strategist
Monday, June 28, 2010: Issue #1290
The Wall Street Journal reported last week that, for the first time in three years, foreign investors are increasing their holdings in the Japanese stock market.
Data released by the Tokyo Stock Exchange shows that foreign ownership of Japanese shares rose to 26% for the year that ended in March, up from 23.5% a year earlier.
The Journal suggests that a recovery in Japanese corporate earnings is tempting foreign investors back to the country’s equity markets.
But I think there’s more going on here. Perhaps hedge fund managers and other savvy global investors have paged back through their old, dog-eared copies of Dr. Jeremy Siegel’s Stocks for the Long Run.
If so, they may have recognized something significant…
Crunching the Numbers on Japan
Siegel notes that it’s rare for stocks to go 10 years without giving a positive return. Yet we’ve experienced just such a rarity over the last decade.
For stocks to go 20 years without giving a positive return is almost unheard of. And 30 years? That’s rarer than Big Foot, Nessie and the Abominable Snowman combined.
Which brings me back to Japan…
- In 1989, the Nikkei 225 – Japan’s equivalent of the S&P 500 – hit a new all-time high near 40,000. Today, more than 20 years later, it languishes near 10,000 – almost 75% lower.
- In other words, the Nikkei 225 would have to rise 300% just to get back where it was in 1989.
And it wouldn’t surprise me if it did just that by the end of the decade. After all, it’s happened before.
In the 1970s, the U.S. market returned just 0.34% a year – a 3.4% total return for the decade. Yet the Japanese market compounded at 16%, generating a 10-year return of 344%.
What other asset class offers that kind of potential return over the next decade? (Gold bugs, keep your seats.)
Don’t Chase the Bullet Train… Get on Board Now
The groundwork has been laid.
Last August, after more than 50 years, Japan’s opposition party trounced the Liberal Democratic Party in a landslide election.
The new government has promised to shrink the country’s massive bureaucracy and cut wasteful public spending. It also intends to end more than 20 years of economic stagnation by cutting taxes and focusing on small and mid-sized businesses.
Of course, we’re all skeptical of politicians’ promises, but there is evidence that they mean business this time. Twenty years is a long time to leave your economy in a funk.
It’s resulted in Japanese stocks being among the cheapest and most unloved in the world. Virtually no one is enthusiastic about the Tokyo market.
However, great opportunities are born when dirt-cheap valuations marry investor apathy. Plus, Japanese investors are flush with cash. They’ve largely ignored domestic stocks after two decades of sub-par returns. And as that money begins to find its way out of mattresses and back into Japanese equities, the Tokyo market should lift off.
This is doubly true when institutional money managers return to Japan in a serious way. For years, global fund managers have outperformed the world benchmark by simply underweighting Japan. But let the Shinkansen take off without them and they will be forced to dash after it.
So how do you play this?
Two Ways to Ride the Japanese Stock Market
There are dozens of worthwhile Japanese ADRs trading on Nasdaq and the Big Board.
But you can gain exposure to the Japanese stock market through two ETFs…
- iShares MSCI Japan Index (NYSE: EWJ), which invests in large-cap Japanese stocks.
- Wisdom Tree Japan Small-Cap Dividend Fund (NYSE: DFJ), which captures the best of the Japanese small-cap sector.
Or you can spread your bets and own both.
Incidentally, if you remain skeptical about Japanese stocks digging their way out of this 21-year hole, consider again how unlikely it is that Japanese stocks will earn a negative 30-year return.
As Dr. Siegel writes in Stocks For the Long Run:
“In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K. Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change.”
The story in Japan was similar. By the end of 1945, stock prices stood at about approximately one-third of their level just prior to the Empire’s surrender. Over the next 40 years, the Japanese market returned more than 20 times its American counterpart.
If 200 years of world stock market history is any guide, the current decade should be another barnburner for Japan.
Good investing,
Alexander Green
21
Treasury Funds: Get These Time Bombs Out of Your Portfolio
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Treasury Funds: Get These Time Bombs Out of Your Portfolio
by Alexander Green, Chief Investment Strategist
Monday, June 21, 2010: Issue #1285
Tens of millions of investors have a ticking time bomb in their fixed-income portfolios.
Are you one of them? If so, there’s still time to defuse it.
A few weeks ago, I wrote an Investment U column entitled, “Why the Safest Investment is Now One of the Riskiest.”
I noted that investors – frustrated by the microscopic yields on money market funds and certificates of deposit (CDs) – have poured money into longer-term Treasury funds.
Their thinking is simple. Too simple: “These funds yield over 5%, not bad in this environment, and the bonds they hold are guaranteed by the full faith and credit of Uncle Sam. What’s to worry about?”
Plenty…
Aren’t Treasury Funds Free of Risk?
Unlike individuals, corporations, and municipalities, the federal government can simply create money to meet any obligations. U.S. Treasuries are thus free of credit risk. But they aren’t free of interest-rate risk.
When interest rates go up, Treasury bond prices go down. Yet investors are comforting themselves that inflation isn’t currently a problem and that long-term rates remain near historic lows.
Don’t be fooled. There is a monster on the horizon – and he makes Beowulf’s Grindel look like Barney.
- Over the past 18 months, the federal debt has surged from $5.5 trillion to more than $8.6 trillion.
- Two years ago, it was 38% of GDP. Today, it’s 59% of GDP. And by the Congressional Budget Office’s own estimates, it’s going much higher still.
This is dangerous. Yet inflation has remained remarkably subdued so far. But understand that if the government opts to stimulate the economy further – especially if some emergency action is needed – short-term rates are already at zero.
Having already thrown the kitchen sink at the slowdown from a monetary standpoint, the federal government will almost certainly opt to spend even more dramatically.
The bond markets will not take this news well. Long-term rates are likely to spike. And when they do, it will get real ugly, real quick.
Investors always think they have time to move out of longer obligations before that happens. But that is not likely to be true…
The Triple Threat to Treasury Funds
Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points, driving a stake through most people’s bond portfolios.
Making matters worse, millions of Mom-and-Pop investors have unwittingly plunged into leveraged bond funds in recent years, often on their brokers’ recommendation.
Leveraged bond funds borrow money in the short-term to buy more longer-dated issues and enhance the funds’ yields. This is all well and good when rates are flat to lower. But when rates spike higher, look out below. The same thing will happen to these funds as to a margined stock portfolio in a correction. |
In fact, leveraged closed-end bond fund investors could get hit with a triple-whammy…
- The bonds in the fund will drop when interest rates rise.
- The drop will be compounded by the fact that the portfolio is leveraged.
- The fund could plunge to a deep discount to its net asset value, too.
Become a Bomb Disposal Expert… On Your Portfolio
Not pretty. So what to do?
- First, check to see what percentage of your portfolio is in long-term bonds. It shouldn’t be more than 10% as a maximum (as protection against a deflationary scenario).
- Second, visit www.etfconnect.com and type in the symbols for your fixed-income ETFs or closed-end funds.
Then look at the number beside the fund’s “effective leverage.” Zero means the fund is unleveraged. But some may be leveraged up to 40% or more. (That’s how these funds are able to yield more than the bonds they invest in, even after expenses.)
In sum, this is a time to pare back your long-term bond holdings and eliminate most of your leveraged holdings.
Don’t take these words lightly. There is danger on the horizon. But if you act now, there’s still time to get that ticking time bomb out of your portfolio.
Good investing,
Alexander Green
Do Trailing Stops Really Work?
by Alexander Green, Chief Investment Strategist
Monday, June 14, 2010: Issue #1280
While I was in Baltimore last week, one of our Oxford Club researchers, Matt Carr, told me over lunch that one of the most controversial aspects of our investment policy is trailing stops.
But they shouldn’t be.
If you don’t have a premeditated sell discipline – and the vast majority of investors don’t – you’re flying by the seat of your pants. And that rarely leads to superior investment performance.
But do trailing stops really work?
Survey Says: Use Trailing Stops
In a word: Yes. Trailing stops protect your profits and your trading capital. And there’s much more than just anecdotal evidence.
In a study published in The Journal of Portfolio Management, Christophe Faugere, Hany A. Shawky and David M. Smith – finance professors at the State University of New York at Albany – researched the performance of money managers who oversee pension funds, endowments and high-net-worth accounts.
Because most institutions work under strict investment guidelines, these academics were able to analyze performance based on differing approaches to selling stocks.
The result? Institutional managers who fared best were those with restrictive rules that didn’t allow much leeway for holding stocks for emotional reasons. Managers who relied on “flexible” sell strategies did far worse.
Count me as unsurprised. Institutional money managers are just as prone to rationalizing as individual investors when they make a mistake. (Hence the old Wall Street chestnut, “What does a broker call a trade gone wrong? A long-term investment.”)
Trailing Stops: Providing Protection… Securing Profits
The culprit is almost always pride, ego, or emotion. Without any kind of sell strategy, emotions come into play. And emotions are almost always wrong.
But by adhering to a disciplined trailing stop strategy, our Oxford Club investment system mows down emotion-driven trading errors like a field full of dandelions.
It cures greed. Eliminates fear. And does away with wishful thinking – as in, “I hope this stock turns around and starts going the right way.”
Of course, trailing stops aren’t the only sell discipline out there. But they’re one of the easiest to implement. They serve two purposes…
- They make sure we never let a small loss become an unacceptable loss.
- They keep us from selling stocks while they’re still trending up.
According to the independent Hulbert Financial Digest, over the past 10 years our Oxford Club portfolios have beaten the S&P 500 by a wide margin. Part of our success has come from diligent research and careful stock selection. But part has also come from cutting our losses and letting our profits run.
Maneuver Past the Market Makers With TradeStops.com
The one knock against using trailing stops is that unscrupulous market makers will sometimes take out your stop order right before a stock takes off.
But Richard Smith, President and Founder of TradeStops.com – and a PhD in mathematics – has a service that provides an ingenious solution.
If you visit www.tradestops.com, you can enter the stocks you own, the price you paid and the percentage trailing stop you want to use. There are several valuable benefits…
- If any of your stocks close beneath your selected stop, TradeStops sends a message – to your cell phone, e-mail, or account page – alerting you.
- Some brokerage firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops information never expires and even offers a 30-day risk-free trial.
- You can track up to 50 stocks at a time. (And whenever you stop out of one, you can replace it with another.)
- TradeStops is easy to use. It’s specifically designed for technophobes.
- It’s reasonably priced. Ordinarily, the cost is $7.95 a month or $79.50 a year. (If you’re an Oxford Club member, you get a special rate of $39.95 a year.) There are additional services available for dedicated short-term traders who want even more.
- It’s important to note that TradeStops notifies you of stops, not your broker. And it doesn’t enter sell orders. But the key is to make sure you have an acknowledged point where you’d be willing to sell any individual stock.
Trailing stops don’t just offer to cut your losses and protect your profits. They guarantee it.
Good investing,
Alexander Green
Editor’s Note: Much of what it takes to become a successful investor comes down to knowing the best times to buy and sell. Some investors rely on technical analysis; others pinpoint fundamentals. But regardless, trailing stops are essential to protect yourself from a volatile, unforgiving market.
Adhering to a disciplined trailing stop policy is just one of the core wealth-building strategies that has made The Oxford Club one of the most of the most successful investment publishers. In fact, over the past decade, the independent Hulbert Financial Digest has ranked The Oxford Club’s Communiqué as one of the top five investment newsletters.
So if you want to take all the guesswork out of the buying/selling process and let the Oxford Club analysts do the work for you, then consider becoming a member. For $79, you’ll receive an entire year’s worth of stock recommendations, with instructions on when to buy and when to sell for maximum profits. (You’ll also be eligible for the special TradeStops rate mentioned above, too). Take a look at the full list of Oxford Club membership benefits.
9
The End-of-the-World Portfolio… Is it Too Early to Have One?
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The End-of-the-World Portfolio… Is it Too Early to Have One?
by Alexander Green, Chief Investment Strategist
Wednesday, June 9, 2010: Issue #1277
First one friend called. Then another. And then yet another.
Now their friends are calling me, too, asking about my “End-of-the-World Portfolio.”
So I’ve decided to just go ahead and tell everyone about it.
All the friends who called – and their friends, too – are well-educated businessmen. They’re convinced that not only the United States government, but also the governments of Europe, Britain and Japan have simply lost their tether.
We’ve all seen deficit spending before. It’s been a problem for decades. But nothing like this…
Putting the Eye-Popping Numbers into Perspective
The unfunded liabilities for Social Security, Medicare and Medicaid alone now top $108 trillion.
Of course, that number is too large to mean anything to most of us. It’s only when you bring it into context that it becomes alarming.
The $108 trillion is approximately $815,000 per U.S. taxpayer. (And this is just the projected shortfall in Social Security, Medicare and Medicaid. It has nothing to do with the rest of the federal debt, which tops $13 trillion.)
Entitlement spending in other parts of the world is an even bigger problem. And the federal deficits are even more gargantuan. In Japan, for example, debt as a percentage of GDP will hit 200% this year.
Many of my friends look at the fiscal problems in Greece – that necessitated a $1 trillion bailout from the European Union – as just a warning shot across the bow. They’re concerned that things are only just beginning to unravel and will get considerably worse.
Are they right? Only time will tell. But here’s what they keep telling me…
Are You At the Mercy of Wasteful Governments?
“Alex, I busted my hump to earn this money. I’ve paid taxes on it. I’ve saved it instead of spending it. I’m not going down with the ship if those boneheads in Washington spend us into oblivion. How do I protect myself?”
Let me begin by saying that I’ve listened to apocalyptic economic forecasts for decades now. Putting all your money in gold bullion, freeze-dried food and shotgun shells hasn’t been a particularly auspicious strategy.
The difference here is that these folks aren’t gloom-and-doomers who have droned the same message for over 30 years. They are ordinarily optimistic folks who think Western governments are driving the world economy down the road to ruin.
The knock against democracy in Greece and Rome a few thousand years ago was that once the electorate realized they could use their representatives to loot the Treasury, all would be lost. Lately, that remark is looking prescient.
As one friend summed it up: “Look, Alex, I don’t care if I’m wrong about Armageddon and my returns turn out to be lower than what they might have been. Just tell me what to do so I can hang on to what I’ve got and maybe match or beat inflation by a little bit.”
How to Allocate Your Assets in the “End-of-the-World Portfolio”
With that modest goal in mind, here is my suggestion if you want to hunker down for the end of the world – a posture that admittedly may be premature.
- Put 40% of your liquid portfolio in a laddered portfolio of AAA-insured, tax-free bonds. (Be sure to buy state-specific bonds if you’re in a high-tax state.)
- Put 40% in a laddered portfolio of inflation-adjusted Treasuries, also AAA-rated. (For tax reasons, these are best owned in your retirement account.) This is your protection against inflation, as Uncle Sam might opt to spend us out of a tight spot with interest rates already near zero.
- Put the remaining 20% in defensive, blue-chip, dividend-paying stocks. I’m referring to food companies, healthcare companies, utilities, defense contractors, gold mining companies and the like. This should provide some growth and income.
Why include stocks at all? Because 200 years of history shows that an 80/20 split between stocks and bonds is actually less risky than a 100% bond portfolio.
On a personal note, I would not invest my own money this way. (At least not yet.) I’m not calling for the end of the world.
But my friends seem grateful just to have a clear-cut plan. One of them even concedes that it’s not his “End-of-the-World Portfolio”: “I tell people it’s my “Cup-Your-Groin Portfolio.”
I suppose it is. I only hope our elected misrepresentatives get the message before we all need one.
Good investing,
Alexander Green
|
Laddering means varying your portfolio between short-, medium- and long-term bonds. This is your protection against deflation and the virtual certainty of higher taxes. |
1
U.S. Treasury Bonds: Why the Safest Investment is Now One of the Riskiest
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U.S. Treasury Bonds: Why the Safest Investment is Now One of the Riskiest
by Alexander Green, Chief Investment Strategist
Tuesday, June 1, 2010: Issue #1271
U.S. Treasury bonds are the safest investment in the world.
However, that doesn’t mean they can’t be dangerous. Far from it.
Yet a few days ago, The Wall Street Journal reported that, “Long-dated Treasury securities are now the most favored financial assets for global investors fleeing the eurozone’s debt crisis.”
Talk about jumping out of the frying pan and into the fire…
Don’t get me wrong. I’m not one of those end-of-the-worlders who expect the U.S. government to default on its sovereign obligations. That won’t happen.
It wouldn’t even be necessary. After all, history shows that governments always prefer to inflate their way out of a debt crisis by cranking up the printing presses instead. That way they can achieve a de facto debt reduction simply by devaluing the currency.
If you’ve seen the photographs of German citizens hauling wheelbarrows full of cash into the bank during the days of the Weimar Republic, you know what I’m talking about.
Of course, I don’t expect inflation like that. And neither should you.
But what kind of inflation does an investor expect who loans his money to the government for 30 years at a rate of just 4.1%?
Why U.S. Treasury Bonds Could Bulldoze Your Portfolio
That 4.1% figure is the current yield on the long end – and it’s a bet that has a little upside potential and a whole world of downside risk. Why?
Imagine a seesaw with interest rates and inflation on one end and bond prices on the other. If inflation goes down, bond prices go up. And vice-versa.
But how far down can rates go on the long end? Unless we have the sort of deflationary environment that Japan suffered in the 1990s, the appreciation potential here is minimal.
On the other hand, if inflation rears its ugly head, long bonds will get clobbered. And the worse inflation gets, the worse these bonds will do.
I realize that inflation is not an immediate threat. Technology and deregulation have brought costs down over the past decade. And even oil prices have moderated lately.
But if the bond market gets even a whiff of higher inflation, these bonds will drop like a stone. And I’m betting that investors who weren’t around during the early 1980s – and even many who were – don’t realize it.
They are so busy patting themselves on the back for eliminating default risk – and picking up a 4% yield versus next-to-nothing on the short end – that they are forgetting about interest rate risk: the risk that higher inflation will send long yields soaring and bond prices crashing.
Don’t Let the Government Trick You into Speculating
Seth Klarman, President of the Baupost Group, an investment firm in Boston that manages $22 billion, says the U.S. government is inadvertently provoking its citizens into taking very bad risks right now.
How?
“By holding short-term interest rates near zero, the government is basically tricking the population into going long on just about every security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.”
Of course, most people aren’t exactly in a speculating mood right now.
So what are they doing? They’re buying super safe long-term Treasuries and earning over 4%.
Except that’s not a safe investment – as many will eventually learn to their chagrin.
Good investing,
Alexander Green
Editor’s Note: Are you concerned about the direction in which America’s elected officials are taking the country? Worried about ever-increasing debt levels? Fearful of major inflation down the road?
Many investors are – and it’s hardly surprising.
But did you know that since 1987 – through bull markets… bear markets… inflation… deflation… debt… unemployment… and the rise and fall of America’s biggest companies – one organization has helped its members generate approximately $19 billion in wealth?
How? Through a simple, diversified, disciplined investing approach, with the twin goal of both building profits and protecting wealth in any climate.
No matter whether you’re focused on the short term, or long term, you’ll find various portfolios and investments tailored to your individual situation. We invite you to join this exclusive and elite group of investors.
