More On Pickens

Found an posting on a Reuters global investment blog, which cited some research done by Birinyi Associates. Based on Birinyi's analysis you should believe what Pickens says. Below is a chart of the price of oil with data points of predictions by Pickens.

Here is the graph with a couple of data points:

1 Was surprised oil went down this much (19 month low) still thinks oil will average $70 in 2007.

8 Oil may surpass $100 on a geopolitical event and will rise to $80 within 6 months.

13 $100 oil will be routine.

17 Thinks oil wil rise to $150 by end of 2008.

Source:
'Pickens Sees Oil at $150...Here's a Look at His Track Record', by Eliis Mnynadu, Reuters News

There Goes Oil Again

Oil has broken the $129 range, with an intraday high of 129.60 (markets are still open at the time of this post). T Boone Pickens was on CNBC this morning saying that the oil producing countries are 'running out of oil'. He projected that oil will reach $150 dollars a barrel this year due to demand outstripping supply.

A couple of quotes from Pickens' interview with CNBC:

• "The Saudis claim they have more oil," Pickens told CNBC. "They don't. The President wasted his time to go to Saudi Arabia, to say, 'Give us more oil.' They can't give any more oil...they're stacking up the money as fast as they can stack it up."

• 'Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million," he said. "It's just that simple. It doesn't have anything to do with the value of the dollar."

• "We are now paying out...an estimated $600 billion a year for oil," he said. "It's four times the cost of the Iraqi war, and not one of the politicians running for president has anything to say about it. I don't know whether they don't know it, or they don't want to mention it."

Source: WSJ.com

Most recently Goldman Sachs increased it's estimate for oil to $141 dollars a barrel from $107, again citing supply constraints. Deutsche Bank, Credit Suisse and Societe Generale have also raised the oil price estimates for 2008 and 2009 based on increased demand and limited supply.

The trend for oil appears to be onward and upward. My guess is that there will be a correction in the oil market when it hits $130 dollars a barrel as traders take profits. It will continue to rise during the summer due to the risk of a hurricane. The wild card in this is at what point will demand be reduced due to price of oil?

Source:
'Oil Rises to a Record After Pickens Says Prices May Reach $150' by Mark Shenk, Bloomberg News
'Pickens: Oil Going to $150, So Move to Gas', by CNBC.com

Frankness From The ECB

In an interview with the BBC, the head of the European Central Bank Jean-Claude Trichet warns that there is 'an ongoing, very significant market correction.' In the BCC, Mr Trichet has compared 'recent rises in energy and food prices to the 1970s oil shock.'

Europe is in a tricky spot right now having to deal with a slow-down in the US, credit problems that have infected European banks, increases in commodity prices and a strong Euro all which are creating headwinds for the EU.

Source:
'ECB head: Credit crunch 'ongoing'', interview by Robert Peston, BCC
'Jean Claude Trichet warns of 'very significant market correction' , by Miles Costello, FT Online

A Play On League Tables

From a website call Here Is The City, a little play on the league tables that the financial industry uses to measure each other. The premise of the table was to look at the total credit losses firms have written down per banking employee.

Below is a graphic representation of the losses per employee.

Source:
'An Incredible League Table - The Credit Crunch In Context', Hereisthecity.com

Money In Disease

Interesting article from the Economist about a new focus by pharmaceutical companies on developing countries. The standard operating procedure for most drug companies has been to market drugs to developed countries, where the population could afford the medication. Or they have developed niche products which cost a lot of money per dosage.

Over the past couple of years, emerging market countries have either created generic versions of the drugs marketed by Big Pharma, or just outright copied their drugs ignoring any patent protection. Most of the pharmaceutical companies have just ignored these developing countries.

That attitude may be changing due to these countries expanding middle class. 'McKinsey, a consultancy, estimates that the value of the Indian drugs market will grow from $6.3 billion in 2005 to $20 billion in 2015. China's market is expected to soar even more spectacularly. Given such prospects for growth, says Mark Feinburg of Merck, an American drugs giant, “you've got to be in these markets—it's a great opportunity.”'

To the right is a graph from the Economist showing the major causes of deaths in China, India & Brazil. The graph is not clear on what the percentage of minor deaths are, but looking at the percentages of the Big C's (Cardiovascular, Cancer, Chronic and Communicable) there is a lot of opportunity to sell some medication.

The three countries in the graph equal 2.6 billion people with a total GDP of $12 trillion dollars, growing at 8%. Developed countries (US, EU & Japan) have a population of 127 million, but a total GDP of $34 trillion dollars, growing at 2%. The developed countries are fairly saturated when it comes to the pharmaceutical market. However the market in the emerging economies is still under-served.

The Economist explains that for foreign companies tapping into these markets its not just as easy as opening a factory and selling drugs.

'Serving these markets will mean building up local expertise and research efforts. Where drugs firms have set up shop in developing markets, it has generally been to cut costs, rather than to cater to the needs of locals. But that is changing. Novartis has opened a research centre in Shanghai and has another outpost in Singapore focused on tropical diseases. Merck has struck several deals with firms in emerging markets to do early-stage research. The drugs giants argue that this new approach allows them to tap a global network of innovation, and also provides insights into local markets.'

Source:
'Quagmire To Goldmine ?', by The Economist
The World Fact Book, by The CIA

Don't Mess With Carl

In a letter sent to Yahoo's board, Carl Ichann has threaten to seek control of the board, if it doesn't renew talks with Microsoft. Below is the first paragraph from his letter.

'It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft. It is quite obvious that Microsoft's bid of $33 per share is a superior alternative to Yahoo's prospects on a standalone basis. I am perplexed by the board's actions. It is irresponsible to hide behind management's more than overly optimistic financial forecasts. It is unconscionable that you have not allowed your shareholders to choose to accept an offer that represented a 72% premium over Yahoo's closing price of $19.18 on the day before the initial Microsoft offer. I and many of your shareholders strongly believe that a combination between Yahoo and Microsoft would form a dynamic company and more importantly would be a force strong enough to compete with Google on the Internet.'

Clearly Mr Ichann motives are driven by money, but he is saying what a lot of people were thinking. What was Yahoo thinking? I am sure that Yahoo thinks that they can go it alone, but what does it have to offer beyond the internet? The buy-out offers gives everyone at Yahoo a nice and neat way out of the business.

Goggle is eating every one's lunch when it comes to making money online, along with developing innovate ways to sell advertising space. Just this week, comScore announced that Google beat out Yahoo for the first time in the number of unique visitors with 141 million views. Yahoo was second with 140 million and third was MSN at 121 million. When it comes to the share of online searches, Google has 59.2% of the market followed by Yahoo at 21.6% and MSN at 9.6%.

Below is a chart of Google, Apple, Yahoo & Microsoft over the past year.

Source: yahoo.com

If Ichann gains control of the board, and Microsoft doesn't want to buy the whole company, will there be more value in breaking up Yahoo?

Source:
'Icahn Threatens Yahoo Board Fight After Failed Bid', by Crayton Harrison, Bloomberg News
'Google Sites Capture #1 Property Ranking for the First Time', by comScore.com

As Oil Goes, So Go The Transports

This makes no sense. Oil has been on a tear the past couple of weeks, rising greater than 20% over the past three months. As one would expect the Dow Jones Industrial Average has been kept on check due to the higher oil prices. It has risen only by 4% over the same 3-month time frame. The chart below shows the DJIA (in blue) compared to the Oil Service Sector Index (in orange). Yes, the Oil Service Sector does not track the price of oil exactly, but is a good proxy.

Source: WSJ.com

Below is a chart showing the DJIT(ransports) (in blue) compared to the Oil Service Sector Index (in orange). Over the 3-month period, the DJIT rose almost 10%.

Source: WSJ.com

Last time I check, the price of oil/gas is a huge expense for these companies. It would seem that the increase would weigh on their bottom line. Has something changed?

I guess not, last Friday FedEx lowered its 4th quarter earnings estimates due to increases in fuel costs. FedEx has been charging customers a surcharge for fuel related expenses, however Chief Financial Officer Alan B. Graf Jr said that these surcharges 'cannot keep pace in the short-term with rapidly rising fuel prices'.

Granted the transportation stocks have responded appropriately to the economic news over the past year, reaching a low of 3,995 back in January. However since that low, the index has risen by 28% to 5,159.

Seems like a good time for a correction in this index.

Source:
'FedEx cuts 4Q profit forecast, blames fuel costs', by Woody Baird, AP

The Spike That Popped The Oil Bubble

Goldman has come out with a research note stating that there could be a 'super-spike' in the price of oil. They are projecting that oil will jump in price to $200 a barrel within the next two years. This would be almost a 65% increase in the current price of approximately $120 a barrel.

The note says 'We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent.' 'The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.'

Source: wsj.com

The report argues that due to the lack of adequate supply growth by oil companies and increased demand by non-OECD countries will lead to a continued increase in the price of oil. The report goes onto predicate that the price increases will lead to a reduction in demand for oil which will cause a strong correction. Goldman's research note states that the drivers for the increase are firmly in place; low OPEC spare production capacity, poor growth in non-OPEC oil production, restrictions on foreign investment in oil production and strong demand from the developing world.

Two years ago, Goldman was on of the first companies to indicate that oil prices could hit the $100 a barrel price range. Could they be right, again?

Below is a shot from a nice interactive feature from Portfolio magazine.

Source:
'"Super-spike" could lift oil to $200: Goldman', by Santosh Menon, Reuters News
'The World Oil Economy' , Portfolio.com

Fed Drops Rates & Stocks Fall

The Federal Reserve dropped the federal funds rate by a quarter point to 2%, and dropped the discount rate to 2.25%. The Fed indicated that it was going to take a wait and see approach on further rate drops. The Fed is concerned that inflation may become an issue, regardless of the fact that it already is a problem for many Americans.

'Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.'

Here is how the stock market reacted to the Fed's statement:

Source: bigcharts.com

The market is addicted to the low interest rates that the Fed is doling out. Why else would the market fall on the news? This 'pause' was as widely expected as this interest rate drop.

Source:
'Fed Trims Rate to 2%, Signals Ready to Consider Pause', by Craig Torres, Bloomberg News
FOMC Press Release

Wealthy, Fat, Lazy...and 7-Star Hotels

This is what an massive inflow of petrodollars will do to a local population:

• If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020;
• Almost a fifth of the UAE's native population suffers from diabetes;
• (A) McKinsey (study) reckons a quarter of native employees in Bahrain, Saudi Arabia and the UAE fail to show up for work;
• Burj al-Arab, the world's only seven-star hotel. Guests arrive by helicopter or Rolls-Royce, watch 42-inch plasma TV-screens in their rooms and choose from 13 pillows on which to lay their heads.

Another problem with all of the money coming into the Gulf region is inflation. The Saudis are dealing with an inflation rate of 8.7%, while Oman has an inflation rate 11.1%.

Most local currencies are pegged to the US dollar, which has dropped like a rock lately. This drop in dollars devalues there currency, requiring more local money to purchase goods not priced in dollars. The inflation rate is even hurting foreign workers who send money back to their home countries. Below is a great explanation on how inflation works:

'When an energy exporter converts its petrodollars at the central bank, domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.'

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.'

Source:
'How to spend it', by The Economist

New Rise of Nationalism

The WSJ has an article in today's paper discussing the rise in nationalism, and the decline in globalism. Over the past several decades, it seemed that the 'nation' would be a reduced factor in world affairs, and that global commerce would be able to knock down all barriers to local markets. The biggest example of this push towards globalism was the creation and continued expansion of the European Union.

Now many countries are asserting control over market forces. Since 2004 Russia, Venezuela, Bolivia and Ecuador have nationalized once private oil companies. 80% of the worlds oil-reserves are control by state owned firms. Countries continue to throw up barriers on exports and institute price controls for food stuffs.

Countries are also throwing up barriers to investments, especially from sovereign wealth funds which total almost $3 trillion dollars. Some countries have identified critical industries which will be protected from foreign investment.

Even the Internet is coming under nationalist pressures. Many countries have asked ICANN to develop a way for them to use their own local alphabet instead of the Latin based one. While in one respect this makes it easier for the local population to use the Internet, it closes off users from other countries.

"The era of easy globalization is certainly over," Daniel Yergin, Pulitzer Prize-winning author.

Source:
'Rise of Nationalism Frays Global Ties', by Bob Davis, WSJ {$$$}

Oil and Gas Prices - New Highs

Oil futures have hit a new all-time high, due to OPEC maintaining their production quota, an attack on an oil facility in Nigeria and an attack on a oil tanker in the Gulf of Aden. I am not sure that these events are really driving the oil market, per se. It seems that the market is looking for any reason to run oil higher. From a Bloomberg News story:

``The price seems to be rising inexorably towards $120,'' said Bill Farren-Price, director of energy at London-based Medley Global Advisors. ``OPEC has a very limited amount of spare capacity left and maybe they're trying to keep that in case there's actual physical disruption.''

Source: wsj.com

Granted oil supplies are limited and demand has/will increase due to growth in China and other countries, but it seems that oil and other commodities are getting ahead of themselves. As prices increase they will eventually reach a point that they will reduce demand and undercut their price support. Again from Bloomberg News, OPEC president Chakib Khlelil was quoted as saying the if OPEC nations increase their output, they 'will not find people to buy the increment.'

With the increase in oil prices, gasoline prices have also increased. For the week that ended on April 18th, a gallon of gas cost $3.4737, up 15.66 cents. Trilby Lundberg is quoted as saying, "(i)f crude oil prices do not retreat, then we will see somewhere between 10 cents to 30 cents rise in the retail price of gasoline, probably in the next few weeks,"

How much longer will the average US consumer be able to handle these price increases? What is left for them to cut back on?

Source:
'Oil Rises to $117 Record on Nigerian Supply Cuts, OPEC Stance' by Grant Smith, Bloomberg News
'Drivers paying record pump prices', by Chelsea Emery, Reuters News

Stock or Industry Selection

A paper published by Jeffery A Busse and Qing Tong, of the Goizueta Business School at Emory University, explains that for consistent performance in a mutual fund its better to have a manager who can pick industry sectors than one who can pick stocks. The paper explains 'that industry selection contributes substantially to fund performance, accounting for roughly half of a fund's abnormal performance.' The paper states that this importance of industry selection is 'stable across time, with little year-to-year variation in the mean contribution across funds.'

The paper is based on analyzing almost 4,000 actively managed domestic mutual funds from 1980 to 2006. The researchers analyzed a manager's industry selection ability by setting up a hypothetical portfolio which replaced each stock in the fund with an index for that stock's industry. For example if a manager bought Johnson and Johnson, the researchers added an equal dollar amount of an index representing major drug manufacturers. If the hypothetical portfolio beat the market, the manager was showed to be good at industry selection. If the manager's stock picks outperformed the hypothetical portfolio, the manager was judged to be good at stock selection.

Based on the analysis, the researchers found that a manager's margin for beating the market was split almost evenly between stock selection and industry selection. However, over a longer period of time, industry selection was a skill that would most likely persist. The paper also found 'a negative relation between fund portfolio size and stock-selection skill'. This 'negative relation' was not present when comparing the size of a fund and industry selection. This fact probably explains why some large mutual funds preform quite well, while others suffer.

Below is a chart comparing Fidelity's Magellan Fund (market cap $38.40 billion) to American Funds Growth Fund of America ($165 billion). Between 1977 and 1990, the Magellan Fund, under the management of Peter Lynch, had an annualized returned of 29%. The fund ran into problems in the late 90's when the funds asset base swell to $100 billion dollars and ended up a 'closet' index fund. As the fund grew, the manager was unable to put that money to work effectively. Stock selection which had been the strong suit of the fund's new manager broke down under the weight of its asset base.

Source: bigcharts.com

On the other hand the Growth Fund of America, has an annualized return of 13% compared to 8.2% for the S&P 500 over the past 10 years. This fund has been successful due to its management structure and sector selection. Rather than relying on one manager, or even a team of in-house managers, it is managed by multiple management teams. This structure has allowed it to grow, while still preforming better than the market. Granted that at $165 billion, this fund will probably have a difficult time maintaining its returns, and will probably end up mimicking the returns of the market. (How large is too large?)

Below is a chart of Van Wagoner Emerging Growth Fund (market cap $15 million) compared to the Russell 2000. In the mid to late 1990s, the Emerging Growth Fund was returning 50% plus returns each quarter by investing in small-cap technology stocks. However, since 1995 the fund has an annualized return of -7.8%. You would have made more money leaving it under your mattress.

Source: bigcharts.com

The funds dismal returns are due to stock picking, and industry selection. The fund focused on small-cap stocks in the technology sector, not the best place to be since the Internet bubble popped in 2000.

Source:
'Mutual Fund Industry Selection and Persistence', By Jeffery A Busse and Qing Tong
'Picking the Forest or the Trees', by Mark Hulbert, NY Times

Dollar Cost Average or Lump Sum

Dollar cost averaging or lump sum, which is the best approach for an investor. The unequivocal answer is either one depending on your situation.

Basic Investment Strategies

Below is a brief explanation of the two investment strategies. Have also thrown in another strategy that is similar to dollar cost averaging.

Dollar Cost Averaging (DCA) is defined as the investment strategy of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. An example of this type of investing is to purchase $1,000 of shares each month to in a mutual fund for a total of $12,000 over a year.

Lump Sum Investing (LSI) is defined as the investment strategy of buying a particular investment at one time. An example of this type of investing is entering in an order to purchase $12,000 worth of shares at a single time. Typically additional purchases would not be made in a significant amount.

Value Averaging (VA) is defined as an investing strategy that works much like dollar cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base. An example of this type of investing is to start by purchasing a set number of shares, and over a period of a time purchasing additional shares each month so that the account value equals $12,000. The number of shares would vary depending on the price of the shares. Months when the price is lower than the intital purchase price, more shares would be bought and the opposite when prices are higher.

Which Strategy Yields The Best Returns?

Using historical data to compare the DCA strategy to the LSI strategy, the LSI method returns higher results 2 out of 3 times. Here is a tool that allows you to test the two methods for each month of the year since 1950. LSI has the advantage since the overall trend of the stock market has been to increase in value year to year. In a rising stock market, DCA is hurt by the fact that with each purchase the cost basis of the shares increases while the LSI cost basis remains constant. Typically in a market that is in a down trend, the DCA strategy comes out ahead because with each purchase the cost basis is lowered.

Below is a chart from AllFinancialMatters.com, that compares DCA strategy to LSI strategy. The LSI strategy (account value) took $19,900 and invested in the Vanguard S&P 500 Index fund on January 2, 1990. The DCA strategy invested $100 at the begining of each month from January 2, 1990 to July 3, 2006, which works out to a total of $19,900 (199 months multipled by $100 each month).

Practical Advice

If you come into a large amount of money and want to invest it, you are better off putting it on all at one time. First is the evidence clearly shows that in most cases you will come out ahead by lump-sum investing. Secondly if you invest it all at one time, you will not be tempted to spend it.

Most of us cannot afford to take a large sum of money at one time and invest it, by default we have to dollar-cost average. An employee sponsered retirement plan (401K or 403B) is a perfect example of dollar-cost averaging. If this is the only way that you can afford to invest, this is your best option.

Source:
'Dollar Cost Averaging', Investopedia.com
'Value Averaging', Investopedia.com
'Dollar Cost Averaging v. Lump Sum Investing - Part II', by JLP, allfinancialmatters.com
'Lump Sum Beats Dollar-Cost Averaging' by Richard E. Williams, Ph.D., and Peter W. Bacon, DBA, CFP, Journal of Financial Planning

Are Commodities The Next Bubble?

Over the weekend Barron's had an article on the boom in commodities markets and that it is probably about to suffer a correction. The article stated that most of the rise in the commodity markets are due to ETFs and Mutual Funds (MF) which are exempt from position limitations put in place by the CFTC (Commodity Futures Trading Commission). These limitations (for every long position there is a short position) are in place to protect the market from excessive speculation due to the limited size of the markets.

The ETF and MF money (every $9 out of $10) is not directly invested with the commodity exchanges, but with dealers that belonging to the International Swaps and Derivatives Association (ISDA). The dealers act as market makers for the commodity markets that the ETFs & MFs are investing in, by hedge the risk they have incurred back onto the commodity markets. What happens when all of the dumb money wants to sell their ETF or MF after the market drops 10-20%? There is too much leverage in the market to facilitate an orderly exit for all of these positions. Below is a chart providing a snap shot of the commodity markets and positions.

A Sucker's Bet

The Barron's article provides a nice little synopses of the issue:

'Here's the problem: The speculators' bullishness may be way overdone, in the process lifting prices far above fair value. If the speculators were to follow the commercial players -- the farmers, the food processors, the energy producers and others who trade daily in the physical commodities -- they'd be heading for the exits. For right now, the commercial players are betting on price declines more heavily than ever before...'

The ETFs & MF have taken almost 60% of the bullish (long) positions. Most commercial dealers have taken bearish (short) positions, betting against the continued rise in prices. These short positions are running almost 30% higher than the previous net-short record in March of 2004. The commercial dealers are the guys who have been in this business for a long time and have seen boom and bust cycles. It would make sense to watch what they are doing.

Everything I Know About Trading, I Learned From the Movies

How many times do you get to quote 'Trading Places' ?

Louis Winthorpe III: Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?

Billy Ray Valentine: Yeah, we got to kill the motherf... - we got to kill 'em!

Will It Last?

From Barron's, 'Index funds offer investors an easy, inexpensive way to gain exposure to a segment of the commodities markets or a broad-based basket of commodities. Result: The funds have drawn many private investors who have never ventured into futures, along with pension funds and other institutional players looking to diversify. But for all the virtues that the funds hold as a way of spreading bets across commodity markets, they take only long, or bullish, positions, avoiding short-selling. In other words, they trade on the naïve and potentially fatal assumption that commodities have the same tendency as stocks to rise over the long run.'

No and yes. In the short term think that the speculative money will run out at the first signs of trouble. The commodity market experienced a 5-10% drop in prices during the past two weeks, but has firmed up. Looking at the charts above, due to the drop in prices it looks like some of the speculative money has started to leave, or at least some have taken profits. Things that might cause the bubble to pop are:

• China / India - these countries have experienced a high rate of economic growth. Any slow down in this growth will affect commodity prices.
• Dollar - the dollar is at historic lows. Commodities are priced in dollars making it easier for other currencies to buy more of the commodities. If the dollar increases in value this discrepancy is negated.
• US - most consumers are spending on goods from China. If the US consumer starts to reduce their spending this will effect the demand for raw materials to make those goods.
• Lack of Buying - who is left to buy? Once there is a lack of buyers, the market will start to fall due to its own weight.

Long term commodities are a bullish bet. The earth's population is not getting any smaller and certain commodities are non-renewable. This sounds like a sweet spot for oil and natural gas companies. Also as more land is taken out of farm use due to urban/suburban development, whats left will become more valuable along with whatever it produces. Agribusiness sounds like a great thing to be involved in. In the words of Jim Rogers:

`If I told you how bullish I am about agriculture, you'd ask me to leave the room. Prices of agricultural commodities are going to explode. Inventories of food are the lowest they've been in over 40 years. The number of hectares devoted to wheat farming has been declining for over 30 years.'

Source:
'Commodities: Who's Behind the Boom?', by Gene Epstein, Barron's {$$$}
Rogers Says Sugar, Other Agricultural Commodities to `Explode', by Dave McCombs, Bloomberg News

1 Qtr Numbers

Stocks ended up for the day but down on the quarter, with the Dow down 7.55%, the S&P 500 down 9.92% and the Nasdaq down 14.07%. This was the worst quarterly performance since the 3rd quarter of 2002. The indexes did bounce off of their lows for the quarter, being down between 12% and 18%.

The question is the market trying to find the bottom, or is this a pause before it drops further? My guess is that as long as there are no new big blow ups the market will trade around this level until next year.

Not to say that Wall Street was overly optimistic, but the down markets seemed to be a surprise.

One reason for the uneasiness (or rotten quarter) is that many on Wall Street expected the first quarter to be much stronger for stocks than it turned out to be. The theory was that big financial firms had taken their hits in the final three months of 2007. However, as the first quarter has shown, the fallout from investments in risky and possibly worthless mortgage-backed securities has continued along with the uncertainty in the credit markets

Source:
'Stocks Gain on Last Day of Quarter', By Tim Paradis, AP Business

Be A Lazy Investor - Part Two

Earlier I posted about how hard work can actually hurt you as an investor. Most people, those not involved in financial markets, do not have the time, tools, skills or the experience to be really good at picking stocks or mutual funds that consistently beat the market. Even if you do invest in the market, you probably do not make as much as you think due to fees, expenses and taxes.

The Pros Can't Beat Market All The Time

Professional mutual fund managers are not able to consistently beat the market. Here is an excerpt from a Motley Fool on line article on mutual funds,

Though you would think that mutual funds provide benefits to shareholders by hiring alleged "expert" stock pickers, the sad truth of the matter is that the vast majority of mutual funds underperform the average return of the stock market. Over time, because of their costs, approximately 80% of mutual funds will underperform the stock market's returns.

In an article in the FPA Journal, Thomas McGuigan studied the returns of large-cap and mid-cap mutual funds over a period of twenty years. Their conclusion was that very few could consistently beat the market over long time periods. Their study also showed that it was impossible to predict which funds would outperform their index. I guess that is why every investment advertisement says that "...Past performance is not a guarantee for future returns."

Below are tables comparing large-cap and mid-cap with an index fund. The large-cap funds were compared to the Vanguard 500 Index Fund. For mid-caps, there was no mid-cap index fund present over the entire study period, so a proxy index fund was created for the study.

The data in the table reflect four main findings:

• The longer the investment time frame, the more difficult it was for active managers to outperform the index fund.
• The percentage of funds that outperformed the index fund over a 20-year period was 10.59 percent.
• The distinction between returns based on growth, value, and blend styles faded as the investment time frame lengthened.
• A long-term investor (10-20 years) had a 10.59 percent to 24.71 percent chance of selecting an actively managed fund that outperformed the index fund.

The data in the table reflect four main findings:

• The longer the investment time frame, the more difficult it was for active managers to compete with the index fund.
• The percentage of funds that outperformed the index fund over both 15- and 20-year periods was 2.63 percent.
• The distinction between returns based on growth, value, and blend styles faded as the investment time frame lengthened.
• A long-term investor (10–20 years) had a 2.63 percent to 13.16 percent chance of selecting an actively managed fund that outperformed the index fund.

How To Beat The Pros

Be lazy, don't invest in individual stocks or actively managed funds. Don't pay attention to Wall Street, CNBC or any Get-Rick-Quick investment schemes.

All you need is a portfolio of just three index funds and you could have beat the S&P 500 last year along with beating it over the past three and five year periods. Below is a chart comparing three portfolios: Second Grader's Starter, S&P 500 and T Rowe Price's 2040 Retirement Mutual Fund. I wanted to throw a retirement/lifestyle fund into the mix to provide a better compassion to the Second Grader's Starter portfolio.

	Portfolio	Equity %	1 Year Return (3)	3 Year Annualized Return (3)	5 Year Annualized Return (3)
	Second Grader's Starter (1)	90%	8.83%	12.31%	17.02%
	S&P 500 (1)	100%	5.49%	8.62%	12.83%
	T Rowe Price 2040 Fund (2)	91%	6.67%	10.31%	14.76%

1) Source: Morningstar Inc
2) Source: T Rowe Price
3) Returns as of 01/03/2008

The Second Grader's Starter was developed by Allan Roth, a Colorado Springs CPA, for his 7-year old son in 2004. Allan developed a portfolio of just three Vanguard mutual funds, Total Stock Market Index, Total International Stock Index and the Total Bond Market Index. This portfolio has four huge advantages for it:

• Owns the entire world and has maximum global diversification;
• Has less than 0.25 percent annual expenses, both hidden and disclosed;
• Is extremely tax-efficient, and
• Automatically re-balances within U.S. and international markets.

The suggested portfolio breaks out as follows, depending on your risk tolerance.

	Investment	High Risk (1)	Medium Risk	Low Risk
	Vanguard Total Stock Market Index VTSMX	60%	40%	20%
	Vanguard Total Intl Stock Index VGTSX	30%	20%	10%
	Vanguard Total Bond Market Index VBMFX	10%	40%	70%
	Totals	100%	100%	100%

1) This was the fund allocation used in the Second Grader's Starter Portfolio noted above.

Other Lazy Portfolios

In 2004, Paul B Farrell published 'The Lazy Person's Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money', which showed the benefits of a simple, easy to maintain and understand portfolio of mutual index funds. Currently he writes for Marketwatch.com and has been tracking several 'Lazy Portfolios':

Equity Returns for 8 Lazy Portfolios:

	Portfolio	Equity %	# of Funds	1 Year Return (1)	3 Year Annualized Return (1)	5 Year Annualized Return (1)
	Aronson Family Taxable	80%	11	13.54%	16.23%	21.47%
	FundAdvice Ultimate Buy & Hold	60	11	6.93%	14.44%	20.32%
	Margaritaville	67	3	10.51%	14.01%	18.63%
	Yale U's Unconventional	70	6	2.78%	12.08%	18.12%
	Dr. Bernstein's Smart Money	60	9	3.72%	11.43%	17.75%
	Dr. Bernstein's No-Brainer	75	4	6.79%	11.59%	17.47%
	Second Grader's Starter	90	3	8.83%	12.31%	17.02%
	Coffeehouse	60	7	-0.23%	9.75%	16.71%
	S&P 500	100	n/a	5.49%	8.62%	12.83%

1) Returns as of 01/03/2008

The portfolios vary in complexity, both in number of funds and in amount of maintenance required, and in returns. One of the main points that gets repeated over an over is to take the emotion out of your investment decisions and re-balance. The article quotes Ted Aronson, AJO Partners' founder and developer of the Aronson Family Taxable portfolio,

Now comes this year's big lesson: Aronson warns that most investors will psychologically resist selling the big winners and buying lesser performers. But that's what re-balancing and "Modern Portfolio Theory" (the theory behind Lazy Portfolios) is all about. You stick to your asset allocations as sector performance waxes and wanes over the long-term. Otherwise you're just chasing hot sectors and engaged in high-risk market-timing

Really Really Lazy Portfolios

For some people, having to invest in three funds and then re-balance every year is still too much work. Not to worry, mutual fund companies have developed Life Style or Target Retirement funds. These funds are a one-stop-funds that invest in a basket of stock and bond mutual funds, shifting overtime from more stocks in the early years to more bonds as the 'target' age is reached. These funds will even re-balance as needed to maintain their asset allocations, all you would need to do is fund the investment.

With this type of investment it is very important to pick a mutual fund company (Fidelity, T Rowe Price or Vanguard) that has low management fees. A minor point to look into is the asset allocation of the funds as there are some differences which may affect returns. See table below for a comparison

	Investment	% of Stock	% of Bonds/Cash	Foreign Stocks as a % of Stocks
	American Century LIVESTRONG 2035 ARYIX	74.9%	25.1%	15.8%
	T. Rowe Price Retirement 2035 TRRJX	87.5%	12.7%	22.4%

1) Source: Morningstar Inc

It Seems So Easy?

It is that easy. Granted there will be people who will say that these portfolios will not work, or that they can't be any good cause they are too simple. The evidence shows that these methods do work, are easy and can be very profitable. As Paul Farrell noted: "Nothing saved ... equals nothing invested ... equals nothing compounded ... equals a less than dreamy retirement".

Source:
"The Difficulty of Selecting Superior Mutual Fund Performance", Thomas P. McGuigan, CFP, FPA Journal
"Lazy Portfolios Annual Update For Recssion '08", Paul B. Farrell, Marketwatch.com
"How An 8-year Old Crafted A Simple Winning 'Lazy' Portfolio", Paul B. Farrell, Marketwatch.com
"2nd-Grader's Portfolio Takes On Wall Street", Allan Roth, CPA, The Colorado Springs Business Journal