ETF Portfolio Underweighting US October Update

It has been another tough month. The ETF portfolio trails the S&P 500 by 13 basis points as of October 3, 2008. The S&P is down 12.89% since mid August, while the ETF portfolio is down 13.02%. As last month, the US dollar's strength is one of the main reasons for the underperformance of the portfolio. Not only has this resulted in greater losses in the ETF portfolio's foreign stock holdings, foreign bonds have also become depressed, and the dividends they pay out were much smaller this month.

Except for US debt (BND), all of the ETF portfolio's holdings are in negative territory. BND's return is a measly 0.98%.

We're at an interesting and frightening juncture. With the passage of the bailout, there is the possibility of inflation or even hyperinflation. Provided foreign currencies remain steady, this will bode well for the portfolio (not so much for us in real life, though). At the same time, some are concerned that what awaits us is deflation. If this comes about (probably even worse for us in real life), the portfolio will continue to shrink.

All portfolio updates can be found here. The chart at the right is updated once a month. A spreadsheet view of the portfolio's holdings is available here.

Here are this month's updates:

Dividends received and reinvested:

BWX $0.133 * 17.23 = $2.29159 [52.08] .044 more shares

IPE $0.325 * 14.878 = $4.83535 [49.39] .0979 more shares

WIP $0.196 * 13.5938 = $2.66438 [50.50] .05276 more shares

VTI $0.296 * 24.026 = $7.11 [54.82] .129728 more shares

RWO $0.464 * 19.036 = $8.8327 [36.91] .2393 more shares

Fresh $500 invested:

VTI $112.25 total 2.0476 shares at 54.82 avg purchase price = 1667.98/26.0736 shares = $63.971986

VEU $120.21 total 3.0279 shares at 39.7 1732.66/36.18 = $47.88999

VWO $158.19 total 5.07 shares at 31.2 1486.48/36.832 = $40.358

BND $0 total .085 shares at 76.46 506.4/6.73 = $75.25

BWX $0 total .48 shares at 52.40 925.2/17.23 = $53.70

RWO $54.66 total 1.48 shares at 36.91 883.23/20.756199 = $42.486584

RJI $91.56 total 9.7925 shares at 9.35 1171.92/102.4215 = $11.44

IGF $29.42 total .8607 shares at 34.18 559.44/14.0087 = $39.935

IPE $0 total 0 shares at 50.72

WIP $29.08 total .57584 shares at 50.50 820.37/14.2224 = $57.681

FRN $9.73 total .5547 shares at 17.54 117.73/5.4597 = $21.5634

Cash -$106.25

Dividend received and reinvested:

SPY $0.691 * 81.7973 = $56.52 [110.34] .51225244 more shares

Fresh $500

SPY $500 total 4.53 shares at 110.34 11000/86.839 = $126.67 cost basis per share


Give Me Back My Money, Reserve!

I've had a money market fund with the Reserve through TradeKing for a couple of years. Less than two months after the Reserve's Chairman and CEO wrote

We are pleased to report that you, and the markets in general, have embraced the very concept and foundation on which The Reserve was founded, an unwavering discipline focused on protecting your principal, providing daily liquidity and transparency, and all the while boring you into a sound sleep. Experience has prevailed and as a result, The Reserve’s assets grew by nearly 100%, or $61 billion, over the past year,

the Reserve's Primary Fund broke the buck because it owned Lehman Brothers paper. As that fund is being liquidated, investors are scrambling to get their money out of the Reserve's other funds. I guess I'm one of those.

When I signed up for TradeKing a couple of years ago, they offered three choices for a cash sweep. One was an FDIC insured account, another was a Reserve Treasury fund, and another was a municipal fund. At that time, the Treasury Fund (RUTXX) had a better yield (which is compounded daily) than the FDIC account. I figured it was just as safe as the FDIC--if the US defaults on its debts, it probably won't have enough money to insure deposits either. So I signed up for the Treasury Fund.

The yield got lower and lower. This September the yield got pretty close to zero. I decided to switch to the FDIC account. I sent TradeKing an email and they started the process of redeeming my money. Unfortunately for me (and all the others who decided the same thing), almost immediately thereafter the Reserve broke the buck on its Primary Fund. This triggered a sort of run on the bank, and the Reserve has yet to pay out its investors. It will begin returning money to Primary Fund holders in mid October, says a press release (PDF).

As for me, I don't know when I'll get my money back. I've been waiting since mid September. My fund hasn't broken the buck, but the Reserve isn't making redemptions on it. TradeKing hasn't been given a timeline.

I'm not yet worried that I'll lose money (aside from interest I could be earning on the FDIC account), but I can't trade with those funds. They've been separated in my holdings, now being listed as a mutual fund pending settlement. Good thing I've made some gains on options these past few weeks, or I'd have no cash in my account at all.

One lesson I'm taking away from this is to consider liquidity when yield hunting. Cash really is king (unless there's a currency collapse, in which case physical precious metals reign). It doesn't earn interest sitting under the mattress (preferably a safer place than that), but you can still use it to buy food when all the ATMs are out of money and the banks are closed. Always keep emergency cash, and silver and gold coins, lying around. The yield they pay is liquidity when electronic money is not available.

Update 10/7/08: After almost a month my cash was finally redeemed.


Don't Panic -- Before You Sell, Consider Buying Puts

What a horrible day for the market. September is indeed a cruel month. With the Dow down 7%, I'm sure lots of people were and will be clicking the sell button on all their positions. They don't care what price they're getting, they just want out. I can't say I blame them. After all, our leaders, with fear and confusion in their eyes, are telling us that the financial system can collapse.

Experts, like Marc Faber and Adam Hewison are telling us to buy gold. Faber says buy physical gold, and store it outside the United States. Others are advocating buying the Yen. I think these are good proposals. Physical gold is better if cash becomes worthless, although it's hard to buy food with it if it's stored in another country.

Faber has also mentioned, and I agree, that if you own a company's stock and your currency becomes worthless, at least you still own a portion of the company. There are plenty of great businesses (e.g., companies that sell products we use daily and that should stay in business) being sold off indiscriminately. If you're holding these, ask yourself why you bought in the first place and where they'll be trading in the longer term.

Have people around the world suddenly stopped smoking? No, but Philip Morris International (PM) is down over 8%. Have people stopped drinking and imbibing in other addictive substances? No, and it seems reasonable to assume that they'll drink and smoke more (look at history--it seems that no matter how bad times got, people still had enough money to drink and smoke). But look at BUD and UST, both of which are slated to be bought by the end of the year. Will people stop buying toilet paper, soap, and similar products we use daily? No. Yet Procter & Gamble (PG) and Johnson & Johnson (JNJ) are down around over 3%.

No one knows where the market will go. It can keeping falling, certainly. Look at the NASDAQ after the tech bubble burst. But it may also go up, given the profound bearish sentiment. Let's say the bailout passes and actually works. If you sell now, just as those who sold after 9/11/01, you'll miss the rally. But there are great perils in holding, your gut maybe saying. That's absolutely true. Shares of the best, most recession proof companies can and do plunge along with the market.

Before you hit that sell button, however, think about how much more you're willing to lose by holding on to your shares. Can you stomach another 10 or 20% while you wait for a recovery? If you can't, sell your shares. You'll miss out on any rebounds, but you won't lose any more. If you can stomach some further pain in exchange for staying in the market and positioning yourself for a potential recovery, consider buying puts on your positions.

By buying puts, you are setting a limit on how much more you can lose, while leaving open potential gains. Granted that this strategy would have been better implemented last week or earlier, it is still worthwhile to consider. With puts, your loss is limited to the following through the option's expiration: price at which you bought the stock + put premium - put strike - any dividends paid out.

For example, suppose you bought PG at $70 a share. Procter closed at $66.75 today. If you sell at that price, you'll lose $3.25 per share, with the potential upside being whatever rate of interest cash pays. Let's say you keep the stock and buy puts. A January 2010 put at the 70 strike closed at $7.70. Let's say you buy it at that price. While your potential gains are unlimited, the most you can lose through January 15, 2010 is $70 + $7.7 - $70 (the strike price), or $7.7 a share less any dividends. (No doubt another strike or expiry date may work better, but this is just an example.)

As another example, suppose you bought Kraft (KFT) at $35 a share. The January 2010 35 strike put closed at $5.40. If you buy one put for every hundred shares, the most you can lose between now and January 15, 2010 is $5.40 a share less any dividends you receive. Your potential gains are unlimited.

If you don't mind limiting your potential gains, you can offset your loss by selling covered calls. Sticking to the Kraft example, the January 2010 45 strike call's last bid was $0.45. Suppose, as above, you bought KFT at $35, bought the Jan '10 35 puts for $5.40, and sold Jan '10 45 strike calls at $0.45. The most you can lose is now $4.95 a share, less any dividends received. The most you can gain is $5.05 a share plus any dividends you receive.

Think about your holding period and your risk comfort level. Before you sell your stocks, look where their puts are trading. It may be worthwhile to buy them and stay in the market. If you have a plan, that you thought up before the crisis, stick with it. If you have no plan, formulate one while the market is closed. Then stick with it.

Don't panic.

Disclosure: At the time of writing, I own JNJ, PG, and PM.

Solar Update

Pretty much everyone in Congress is for renewing the alternative energy credits set to expire this year. On several occasions, Congress failed to pass a bill because of an argument over how to pay for the credits, as I mentioned in August.

Congress is still stuck on the same issue. Last week, the Senate finally voted to renew the provisions, granting an eight year extension for solar energy. Solar stocks rallied, as expected. Then the House of Representatives voted and passed their own version (four of them, actually). The House bills also provide an eight year extension. Solar stocks sank, because the House passed provisions that Bush threatened to veto.

With apparently no negotiations taking place to eliminate the provisions the White House does not like, there's a danger that the energy credits will expire. Lawmakers will soon retire for the year.

CQToday has a chart (it's a PDF) summarizing the differences between the Senate and House bills.

Speculators may want to consider strangles on ETFs KWT, FAN, PBW, PZD, or TAN, or single stocks like ESLR, FSLR, or STP.

Disclosure: I am long ESLR stock. I am also long ESLR puts and short ESLR calls.