Q2 ’08 Portfolio Review

July 23, 2008


Global, GDP-Weighted Portfolio

July 10, 2008

Late last year, my friend Michael and I had an idea for a global index: a portfolio allocated to international ETF’s based on weighted GDP growth of the countries. This contrasts with most global indexes, such as MSCI, whose allocation is based on market capitalizations.

I should note that we have no real idea about how the portfolio would have done in the past because back-testing proved prohibitively complex and expensive.

In any case, our idea was based on two basic assumptions:

1. The equity markets, over long periods of time, tend to go up at roughly the rate of GDP growth in a country.

2. We knew that the portfolio would be incredibly volatile – this would make it ideal for a long-term investor who was dollar-cost-averaging into the portfolio

We were certainly right about #2: if we had gotten into the portfolio last year, we would have lost a fortune! Emerging markets – which would make up a large percentage of the portfolio because of their above-average GDP growth – have been slammed this year. Nevertheless, for people who want an EM allocation, now is certainly a better time to buy than 6 months ago…


Fertilizer Shortages

April 30, 2008

* Today’s NYT has an interesting article, filled with pictures, charts and video describing the global fertilizer shortage.

* For help understanding “scarcity economics”, read Jim Jubak’s latest article: Why we’re stuck with insane prices

As with every market bubble, we’re all looking back with 20/20 hindsight and thinking: “this agriculture boom was just so obvious!” In this case, I feel pretty good because I’ve owned Potash and John Deere for about a year, catching huge gains in both stocks. Even so, of course I wish I had been a couple years earlier!

Setting aside moral concerns for now (and I certainly have some), the recent sell-off in the sector could be a good time to initiate or add to positions. The demand for agricultural products — especially fertilizer — is white hot and not likely to decrease anytime soon.


Real Estate is Cooling All Across the Globe

April 14, 2008

NYT: Housing Woes in U.S. Spread Around Globe

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries, like this one, will face an even more wrenching adjustment than that of the United States, including the possibility that the downturn could become a wholesale collapse.

Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.

Is a global real estate slow-down factored into equity markets?

This is the reason I’m avoiding the financial and consumer discretionary sectors — too much risk there and I don’t think it’s reflected in current prices.


Investing in Agriculture

April 8, 2008

Unlike the global water shortage, the global food shortage has presented compelling investment opportunities.  Farms, farm equipment makers, seed/fertilizer/herbicide companies are all raking it in.

I have owned Potash (POT) and John Deere (DE) for about a year.  Now that every stock in the sector has doubled it seems so obvious — sure wish I had bought more!  Fortunately, the agriculture sector is in a mega-boom that will last for years.

See today’s Jubak’s Journal for an overview of the reasons for the boom and why it will continue for at least a decade.


No Recession After All?

February 15, 2008

On Tuesday, the Dow rallied 178 points after an unexpected rise in retail sales of %0.3 when economists were expecting a decrease.

Maybe the economy is not so close to recession after all!? Not so fast says the Big Picture blog: Real Retail Sales Fall to 2003 Levels . In a series of posts, BR demonstrates that the rise in retail sales was all inflation and/or energy related:

Take the Retail Sales EX Inflation (gasoline, food & beverage) and retail sales were DOWN. Excluding inflation, demand at all other retailers last month were unchanged to negative. Economically, speaking, how bullish is that?

This is why I read blogs – you rarely get this kind of insightful analysis about what’s really going on from the mainstream news. CNN’s headline is simple: retail sales were good and that’s why the market rallied 200 points.

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I have increased my cash position to 40% of the portfolio. I’m also looking to add short exposure either through put options or ProShares UltraShort products.


Some Ramblings About the Economy:

January 31, 2008

As the credit orgy ends, and the excess leverage of the past years unwinds, few people have experienced any real pain. Big banks such as Citigroup have lost tens of billions, but who cares? There were rich Asian and Middle Eastern investors flush with cash who were happy to infuse it into Citi for a big chunk of equity. The only people hurt by this were existing Citi shareholders.

What happens to all of that “money” we thought we had when houses were priced higher? Individuals felt rich for two reasons: first, their personal balance sheets looked great because their houses were worth a fortune. Second, people extracted all the equity they could from their houses to consume. Ok, that’s all over now, so what happened to all that money people thought they had? Did it just evaporate? The velocity-of-money effects that pushed everything higher should now be working in reverse.

But the good thing about having a central bank and a paper currency is that you can literally create more money out of thin air. By lowering interest rates, issuing repos with junk as collateral, deficit spending, accepting a bunch of Asian money, the broad monetary base is being replenished.

If the Fed can pull us out of this mess without any real pain I will be shocked. It just doesn’t seem possible that you could unwind from a massive debt bubble without a recession. There just has to be some pain.

Middle class people in this country are hurting. They work night and day and yet their incomes, in real terms, are declining. Worse, they are consuming themselves into incredible amounts of debt and saving nothing. If we acknowledge that much of this consumption was financed with debt and was unsustainable, how can we possibly get out of it with a quick fix? It seems obvious to me that people need to stop spending so much — they need to downsize.

If people actually started to do this though, a long recession would be almost unavoidable. There are very powerful interests all over the world that will fight this with all their money-printing might. Because of the demographic issue facing the rich world, everyone is terrified of what happens if the US consumer has a change in outlook and starts to save instead of consume.

Ok…. None of this is news. What do we do with our money now?

Here are two important themes that shape my views. They could be completely wrong, by the way, so feel free to trash them in the comments (or to me in person) if you disagree.

1) As anybody who reads this blog knows, I think we will have lots of inflation in the coming years. Inflation of 3-4% may not seem like a lot, but if it is sustained over a multi-year period the cumulative effects will be huge. My prediction is that gold will resume its standing as a currency and will continue to gain value against paper currencies all over the world. Or, you could look at it this way: paper currencies will lose purchasing power while gold maintains its value.

2) Because of #1, US Treasuries look massively overvalued to me. They are priced as if we are going to experience deflation, something which the Fed will do absolutely anything (including trashing the value of the currency) to prevent.

3) “Emerging” economies all over the world have realized that the way to improve their standards of living is through markets. Capitalism, in one form or another, is on a tear across the world. You can’t have free markets without strong private property rights. These laws are being strengthened all over the world… especially in the BRIC countries (well, maybe not Russia).

What this means is that stocks will be a great way to make money! US Multinationals will probably do well, but we are seeing the emergence of new multinationals coming from what we use to call “the third world.” Personally, I think the Indian stock market will be a fabulous way to make money in the coming decades. As with the United States during its industrialization (18th & 19th Centuries), the path to prosperity was anything if not volatile. Same thing will happen in India and China – there will be huge booms and busts. The key is to be liquid and prepared to buy after the next crash.

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