Sunday Morning Coffee

Barron's had this to say about Farmland courtesy of TIAA CREF;

"From a historic perspective, it has delivered a fairly stable 8% to 12% return" annually, said Jose Minaya, managing director for natural resources.

Soybean, corn and wheat prices can be volatile, but farmland is a finite resource and less vulnerable to weather conditions and other factors. It has low correlation to other markets but high correlation to inflation, so it's a good hedge. People are always going to eat, and population growth in emerging markets will mean increasing demand. Minaya notes that buying farmland is also "an efficient way to get exposure to water."

The article half jokingly wondered if there might be an ETF coming at some point. I don't think there is much argument about the niche being important but there is debate on whether it should be part of an equity portfolio and of so how to capture it.

I think this can a place to add specialized exposure to South America or Asia. There are plantation stocks from Asia that for now are not so easy to trade or get information on, but still they exist and in time learning about them and accessing them will only get easier.

A couple of examples of names I have looked at in the past include New Britain Palm Oil Company (NBPOF) which is listed in London but owns plantations in Asia. M.P. Evans (MPEVF) is also listed in London with operations in Asia. The volume on both is rough to be sure but it is access for anyone so motivated. There are also a bunch of related stocks with primary listings in Asia that are even tougher to trade. Whereas the two above are from London, I think trades can get done even if it takes patience and a padded limit.

South American names might be a little easier to access. Most people know about Cresud (CRESY), I exited a personal trade on that name this past week. There is also Cosan (CZZ) from Brazil which is a sugar company. This one is big into ethanol which might change the dynamic, that is up to anyone interested to figure out for themselves.

If you do any research here, looking at one company will lead to others to look at and you might find one that makes sense to you to own. I would suggest anyone going down this path look at a lot of companies even though the most you'd probably own is one. But making an afternoon of it with a football game on sounds like a pretty good day.

And yes a picture of Fenway Park has nothing to do with farming.
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The Big Picture for the Week of October 17, 2010

Early in the day yesterday Joe Moglia was interviewed about his second career (actually he went back to a career he had when he was much younger). Moglia was was CEO at Ameritrade (current Chairman) and is now an unpaid assistant football coach of sorts for the University of Nebraska Cornhuskers.

The way the interview went Moglia seemed thrilled to have the "job" which was obvious and there was more than an implication that he could get a head coaching job which was not so obvious (to me) even with his experience but maybe he could.

This is a great template (even if unrealistically successful for most of us) for how retirement needs to evolve or more correctly is now evolving. Over the years for all the times he's been interviewed it would be difficult to have missed how much he loved coaching football. He is willing to do it for free and (based on the interview) there could be an opening to a paid gig.

A story like this tying in to sports is an easy one for me to relate to. Depending on where you live there are a lot opportunities, of course the key is willing to do some job for free because you love it that much. When you find something that you feel lucky to be doing for free you will do a great job which then brings the potential for something paid to develop.

On a similar note there was this article yesterday on Yahoo Finance with very short stories about how people are innovatively building their retirement strategy. One little story was about a retired school teacher with no debt who ushers at university sporting events and cultural events which allows her to see things for free and presumably puts a few bucks in her pocket without feeling tethered to a time clock. Also embedded in her story were several references to living below your means.

And as a quick followup from yesterday; the Market Vectors China ETF (PEK). Yesterday I mentioned that the fund is very broad based and heaviest in financials. I also said anyone interested in the fund needs to look under the hood to understand that the exposure is being replicated with derivatives which isn't usually an issue except during times of market trauma. Well PEK appears to be having issues already after only two days and far sooner than certainly I would have expected. With a big tip of the hat to Ron Rowland PEK is trading at a double digit premium to NAV. I mentioned in my post that at times A-shares have traded at huge premiums to shares listed elsewhere in the past (talking the same companies) and at this point I do not know if this has anything to do with that although I doubt it.

This makes for an important reminder about new ETFs that I used to include in just about every article about new funds that I wrote for theStreet.com which is that new funds, especially those that are not plain vanilla, need to be given a little time to trade to let things like this pop up (or not). If this turns out to be an issue with the creation/redemption process (which seems more likely, or maybe it is an arbitrage of some sort that is beyond me) then I would think that this is just a kink to be mostly worked out and if that is correct then the premium would probably suck right out of the price leaving someone holding the bag. Based on the first couple of days trading it does look like PEK will be a very popular trading vehicle.

As I said yesterday I prefer narrow exposure for China.
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An ETF Door Opening, Part Of The Way

Van Eck yesterday listed the Market Vectors China ETF (PEK) which will capture the Shanghai Composite Index AKA the A-share market. If you have any interest in the fund you need to read the particulars, most importantly that the fund will not own the stocks but derivatives to replicate the index.

This sort of composition creates concerns for some that something can malfunction as there have been malfunctions in other non-plain vanilla funds occasionally in the past. While I won't set unrealistic expectations about any potential malfunctions (like counterparty risk or some sort of market seize-up) I will say that fund malfunctions thus far have only occurred during times of extreme market trauma.

The Shanghai market is not really accessible (look up QFII if you want more details) and one day it will be. There are obviously a lot of stocks in China. Many of these stocks have listings on other markets too but the closed nature of the A-share market has caused huge price discrepancies between A-share listing and listings in other markets. This has not had much front burner attention lately but to the extent this issues exists it could be less if that market opens up.

If you've ever looked under the hood of any Chinese indexes you will see some interesting stocks. China funds, including PEK, can be difficult to own because of how heavy they are in financial stocks. We know there is over-capacity in real estate, the provinces have what amounts to off balance sheet debt and there is ongoing real estate speculation that the government doesn't quite know what to do with. These things in varying ways threaten financial stocks and instead of trying to sort this all out I think it makes more sense to seek other parts of the market that are not in the direct line of fire for these issues.

Globalx has six sector funds and plenty of the names in those funds cross list in Shanghai but where there is now one ETF that sort of gets in broadly it makes sense to expect narrower access to the A-share market in the future.

On the road to ruling the world China will have boom times and there will also be mistakes that impede that market. As difficult as it sounds the ideal access to China will include catching the upside while avoiding the parts of the market that are most at risk to total meltdown. This requires work but is not impossible. At its low, XLF was down 83%. How many of your holdings went down less than 83%? Well then you avoided that which melted down the worst with some portion of your portfolio in the US and so could probably so the same with another country. What is a particular country most vulnerable to? Whatever you think that is, avoid or underweight it.
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Seriously, Stay On Your Mat

Charles Kirk had a post up that I thought was particularly useful both for the investment implication but also the philosophical implication too. In the post he answered a reader email who feels that the US equity markets are being manipulated by the US government and the reader believes Charles should comment on this more.

You can get a sense of Charles' reaction from the title of the post which was "Life’s Not Fair – Get Over It!" Charles, taking the trader's viewpoint, believes that devoting a lot of time to the markets being manipulated is likely to come from someone who is not trading well and looking to blame someone or something. Additionally Charles feels it is simply counter productive to dwell on negative energy.

Long time readers will recognize this title of this post from past posts of mine as a yoga reference meaning don't worry about how the person next to you is doing the poses just focus on what you can do with each pose. You can also tell from the title that I generally agree with Charles' take on this although I do come at this as far less of a trader than Charles.

Although I agree with Charles I do come at this issue differently. If you do not believe the market is manipulated then none of this matters. Charles reminds the reader that the market is often/always being manipulated by someone. This has been true before and will be true again. if you agree with Charles about this, then it seems to me that the manipulation is beyond our control.

As a part of my DNA I tend not to worry about things beyond my control and instead focus on things that I can control as a more effective way to solve how something like this might impact me or my clients. As this relates to portfolio management, think about the Quantitative Easing, or more topically QE2. I guess the debate over if is now over and the world has moved on to how big and over what time frame.

That the US is at the point of a second round of QE means we are trying to understand just exactly how bad off the US economy is. QE is an act of policy desperation with very little realistic chance of solving the problem--if nothing else time solves these problems and the government's steps to help solve the problem will either facilitate a faster solution than would naturally occur or serve as an impediment to same (this is a belief of mine).

To the extent that QE is about US economic health then it is also about US economic cyclicality and we know QE2 is an act of desperation to restore normal cyclicality an investor can control the extent to which they are exposed to desperate policy maneuvers. Embedded in this is that part of QE and QE2 is what many people believe is a manipulation of the US markets.

Determining that added all up, the QE2, the manipulation and so forth, US cyclicality is better avoided is a reasonable conclusion and within your control. I think this is different than lamenting over what is wrong or put another way trying to solve the world's problems.

If you are a do-it-yourselfer then you only answer to yourself and can have more regard for solving the world's problems but if you manage other people's money then your job is give your clients' money the best chance possible to grow to the point where they need it to be.

I think it is only logical to avoid or minimize that which relies on QE2 working which is US cyclicality. From the start of this site I've written a lot about the US becoming a less attractive investment destination but current events have exceeded anything I had in mind when this thought first occurred to me. So the task has become finding innovative ways to give whomever you serve (yourself or your clients) the best chance of having what they need when they need it (repeated for emphasis).

While I can appreciate that people may not come at this the same way it is the only conclusion I draw about how to move forward in the portfolio; that is seek out the healthier parts of the world or themes where money will flow (presumably stocks in themes where money will flow would benefit) and avoid countries or market segments relying on desperate measures (also repeated for emphasis).
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Portfolio Innovation

We are back from our annual trip to the Grand Canyon. I shot a video at the North Rim but somehow it failed to upload to YouTube. It was short so I'll just recap what I said in writing.

At some point I heard a Tony Robbins commercial on CNBC on satellite radio and believe it or not he said something interesting about innovation in trying to sell whatever it was. He asked a question like what have you done that is innovative that will help your clients?

If you manage your own portfolio you then are your own client and obviously if you are an adivisor of some sort then you really do have clients. Either way what are you doing that is innovative that will help you have enough money when you need it? Clearly the recently ended decade required innovation to avoid being down twenty whatever percent. It seems as though the new decade will require innovation. That does not have to be a prediction of another down decade but what if ten years from now the S&P 500 is only at 1402--20% above yesterday's close? That wouldn't get it done for most folks.

I think it is fair to say this site has devoted a lot of time to exploring innovative ways to build a portfolio and I think this exploration has hit on some interesting things some of which have helped our clients. And while any innovative ideas that might have contributed to our result is all well and good the process of seeking innovative ways to construct the portfolio must continue by necessity. It cannot be assumed that just because some product or country or niche worked in the last five years that it will work for the next five years. This makes the task both exciting and possibly daunting but either way I am convinced innovation in portfolio construction will continue to be crucial.

One point I made in the video was that diehard indexing, though it worked in the 1980s and 1990s, is not innovative. This is an interesting take on all of this. In business do you believe in innovation? That might be framed in a way where saying no is impossible but in a very serious manner, is do-it-yourself portfolio management a business? If it is, then what role should innovation play?

You know how I feel about this so this becomes a chance for you to look yourself in the mirror and decide for yourself.
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Australia and Beyond

Barron's had several references, in different articles, this weekend to investing in Australia, Canada and New Zealand. There were a couple of quotes here and there from Kathleen Gaffney from Loomis Sayles and this article in the mutual fund section.

The primary focus of the feature article was that China is creating a tailwind for Australia because China imports a lot of resources from Australia. I would add that there is visibility for other countries to need more resources over the course of the new decade similar to China even if in smaller magnitude.

The bigger idea behind the comments about Australia and Canada (New Zealand is in a different situation being more of an agricultural economy as opposed to mining stuff out of the ground) is the often referred to ascending middle class. The quality of life has been improving in quite a few countries for a while now and this will spread to many other countries in the coming years. That this will happen is indisputable although the vast improvements that will occur should not be thought of in US terms. For people who don't have it now, getting access to solid housing, running water, reliable electricity and protein for a couple of meals a day is a dramatic improvement that most of us probably could not relate to.

The investment possibilities that stem from this are vast. In no particular order we've mentioned the resource suppliers, companies that are part of the food solution, utilities providers, builders of the infrastructure, services like phone (probably wireless) and TV (maybe not 500 channels like we might get), EG shares thinks mall operators/real estate companies can benefit, aspirational items like Nike shoes (we own this stock for clients), day to day products like toothpaste and shampoo and there are others. All this can happen, IMO without US banks, Japanese companies or many companies from big Western Europe.

In the past I have mentioned Kazakhstan as having the potential to be an interesting investment destination for the vast resources in the ground while noting some serious corruption obstacles. If it can ever happen for Kazakhstan it will be because of the above. It could also be the catalyst for Mongolia to become an important and more easily accessible investment destination one day as well. Both countries have a couple of individual stock choices with companies listed on other exchanges (Hong Kong, London and Toronto).

The path of how it could happen is very easy to see. The world needs more resources, these countries have them, they either address and solve their obstacles or they don't. If they do then the quality of life for (almost) everyone there will improve lifting the fortunes of the nation. The work now, for people willing to take the time, is a little bit of understanding of the current situation and then a fair bit of ongoing monitoring.

If you agree with me that Australia, Chile and Norway are useful investment destinations then maybe you will agree that there will be other countries that in time will serve the same role in a diversified portfolio. You will help yourself by isolating these countries early on and figuring out what they can do for you. Some of this can be done with ETFs but not all of it.

This post was the second of two "time bomb" posts. We've been at the Grand Canyon since Sunday night for our annual trip (we live two hours from the South Rim). We are driving home from the North Rim this morning.
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Delayed Reaction

For fear of having my own Jerk Store moment (albeit without the animosity)...

Back in March I wrote a post questioning David Kotok's Cumberland Advisors being and ETF-only shop. Per his comments in numerous TV appearances they are not ETF-centric they are ETF-only. I did not know this until yesterday but apparently he replied to me a couple of days later in a commentary posted on his site titled "Thank You to Roger Nusbaum, Melissa Lee, Eugenio Moreno." Hey, I'm Roger (silly humor attempt on my part)!

The general tone to my post was ETFs solve a lot of problems but cannot address every single issue, this is a recurring theme here. Kotok leads off with "there is no LEGAL informational advantage with a single stock." He goes on to talk about opinions being potentially wrong and there being consequences when opinions are wrong. He also mentions something near and dear to my thought process that "either you are totally current all of the time on every item concerning a company, in which case you have informational neutrality, or you are missing something for some reason that others have not missed and you are at an informational disadvantage." I take this comment to be about time available to spend and I agree that the manner in which one constructs his portfolio is largely a function of time.

Kotok seems to place more weight on the competitive nature of the information one investor has versus the information that another investor has about the same stock or different stocks in the same industry which is much different than my approach of thinking that if I want exposure to Denmark then what is the single best way I can come up with to do that. And of course my conclusion about the best way to access New Zealand could turn out to be incorrect.

I don't know much about the specifics of how Kotok constructs portfolios. I know they are done at the sector level and I know he is very cognizant on global markets (he has had very specific views on the euro for months for example) but I do not know whether individual countries are used or whether themes are sought out like emerging consumer stocks which are now easy to access in ETFs. My hunch is that one way or another these ideas do make their way into their portfolios.

My original comment back in March was to be surprised that this firm is ETF-only as opposed to ETF-centric or heavy. Kotok seemed to make the case for ETFs in his reply to me as opposed to explaining ETF-only but that is of course subject to interpretation.

In wanting to build the most useful portfolio possible I want to make use of every resource available to me which includes common stocks. Kotok's point about information is correct but I am not sure it is more important than access forgone.

As an example I have been writing about Chinese toll road stocks for several years. The liquidity for now (until Schwab allows direct access to Hong Kong) is such that I am not confident about getting over 100 clients out at once if I had to but I have held Jiangsu Expressway (JEXYY) personally for several years and have had good luck with the price action and the yield. I have come to believe this space is a very good way to access China for reasons I've written about many time before. As far as Kotok's point about information, this is something I have talked about many time before. I would expect that in a given year one of the Chinese toll roads (there are quite a few of them) will be the best performer and that in the next year it would be one of the others. This is not universally true but generally speaking no one stock in a group will be the best one every year for the rest of time.

If in the case of Chinese toll roads the group generally does well and I am at least a mediocre stock picker (not a particularly high bar to set) then the value is added by making the decision that "I need to own a Chinese toll road" not when the particular stock is chosen.

For another country the best solution might be a cement stock, for another maybe an ETF is the best answer. ETFs are a fantastic tool to have at our disposal but there are other tools available as well and for people able to spend the time they should make use of all the resources at their disposal. Marc Faber has talked many times about Thai Tap Water and it has turned out to be a great performer while paying a monstrous yield. There is nothing wrong with assessing multiple options and assessing the best way for you to get into something you think should be owned. Chances are you, investing for yourself, are far less constrained because something only has a dollar volume of $30,000 per day.

Before anyone adds one plus one and gets eleven a portfolio full of names like this is probably a bad idea but one or two at a 2-3% weight will mean you only need to focus on the company not worry about the portfolio being illiquid.
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