Musical chairs with the financials

When Warren speaks, the market listens.   That was evident Friday morning when Warren Buffet, the Oracle of Omaha, disclosed that he had increased stakes recently in one of either American Express (AXP) or Wells Fargo (WFC).   

The result was both stocks were up during the day and the financials, which are now in about Round 3 of their beat-down, got a slight reprieve.   Will it last? Doubtful.   

The housing crisis is still far from over, according to many experts, including Warren himself.   Banks are holding huge volumes of real estate that they have had to write down values on and can't sell due to a lack of qualified buyers or investors who are still waiting on the sidelines for prices to fall further. Litigation and finger-pointing still continues in connection with auction-rate securities, which were sold to thousands  of investors — including this one — as safe, secure, cash-like investments, when they were anything but.   

I'm just starting to get into Mohamed El-Erian's book "When Markets  Collide: Investment Strategies For the Age of Global Economic Change," but what I've learned so far about the risks that major banks took and the complicity of ratings agencies in making various types of securities and credit look better than they were, is staggering.   

The co-CEO and co-CIO of the Pimco bond firm also writes about cutting a vacation short in August of 2007 to reassess the cash position of the Harvard Endowment, which he ran at the time.   The worry was that even safe havens like money markets may not hold their $1 per share par value and "break the buck," which some did.   

Bottom line: There are probably more surprises to come. One such surprise, which preceded Friday's smiley face for financials, came from a former International Monetary Fund economist who predicted  that a major U.S. bank — as in one of the big boys — would fail in the next several months.   You know what they say about opinions, but that is one that probably shouldn't be ignored.   

That said, here's how I've been playing the financials: I took off half my position in the Financial Select Spider ETF (XLF) and entered equal positions in ProShares UltraShort Financials ETF (SKF) and ProShares UltraShort Real Estate ETF (SRS). I paid for those moves on Friday, after the Dow finished up nearly 200 points. I ended the day down better than 5 percent on each of the short ETFs, which go up in price when their sectors fall. 

But the Wall Street Journal reported that SKF was at the top of the list at midday for buying on weakness, meaning the largest inflow of money entered the ETF despite its price dropping. I still have long exposure through ETFs to the Dow, S&P 500, mid-caps and financials. I'm hoping that the shorts help hedge my portfolio for when the next shoe drops. 

But the real rationale behind this strategy is that I'm just plain confused.

Brian

New investment vehicles seek to mimic the master

Add another innovation to the investor’s toolkit. 

Deutsche Bank has issued a set of exchange-traded notes that attempt to duplicate the value-investing prowess of the late Benjamin Graham. 

Graham is known as the father of value investing and he authored the two books "Security Analysis" (with David Dodd) and "The Intelligent Investor," which are both considered must-reads for serious investors. I confess to having read neither, but they’re on my list, I promise. 

One of Graham’s most noteworthy disciples is Wall Street guru Warren Buffet. Graham espoused investing in companies as if one were actually buying into the business. 

For that reason, he recommended buying stock only in companies that had sound, liquid balance sheets and good prospects for profits. 

That’s what the Benjamin Graham Large Cap Value Index Total Return (BVL), Small Cap Value Index Total Return (BSC) and Total Market Value Index Total Return (BVT) ETNs seek to do. 

ETNs are similar to exchange-traded-funds, which are baskets of stocks like mutual funds that trade throughout the day as an individual stock would. However, rather than stock, ETNs invest in debt. For that reason, ETNs are subject to credit market risk, experts say. 

And despite the namesake pillar these new ETNs are built on, some were already questioning the hype factor of the investments before the prospectus ink was even dry. 

"Celebrity branding makes me nervous," Matt Hougan, editor at IndexUniverse.com, told MarketWatch. "How will these things actually perform? Just because I wear Air Jordan [shoes], it doesn't mean I can dunk." 

Time to board airline stocks? 

Sitting around Tampa International Airport at about 12:35 a.m. last Monday after my visiting 12-year-old son's plane from New Jersey had been delayed at least three times, I was thinking about how cruddy, how absolutely horrible air travel and the airline industry has become. 

That thought was solidified with the remark one of two de-planing pilots made to an anxious passenger running back to the gate to retrieve an item he had left behind. 

"It's at the pawn shop already," the empathetic pilot said. "Did you see the look on his face?" the other pilot said as the man rushed down the walkway to the plane. 

Charging for pillows and blankets? Charging for water? 

But despite the industry's woes, some are seeing value in airline stocks. 

Much of that optimism, however, has come from the steep drop in oil prices. No one can say with 100-percent certainly that oil prices will stay down. 

But the move has caused shares of U.S. airlines to rebound in recent weeks. Last week a Morgan Stanley analyst predicted that the sector might return to profitability if oil prices are held in check. 

The Morgan Stanley analyst singled out U.S. Airways (LCC) and United Airlines parent UAL Corp. (UAL) as most likely to benefit from more favorable industry conditions, according to the Wall Street Journal. 

Still, I tend to embrace the advice of "Mad Money" host Jim Cramer, which is to never own an airline stock, under any circumstances. There's just too much uncertainty involved in the industry, regardless of how many pillows and cups of water they can sell.

Brian

Shotgun ETF approach keeping me in the game

The market put a nice finishing touch on the week Friday with the Dow's surge of more than 300 points. 

Whether it was renewed dollar strength, crude's drop to a three-month low, or the magical powers of 08-08-08, I don't really care. I'm just glad it happened. 

I picked up about 2 percent for the day in my portfolio consisting of four ETFs: Dow Diamonds Trust (DIA) and State Street Global Advisors SPDR S&P 500 (SPY), S&P MidCap 400 (MDY) and Financial Select Sector (XLF). I'm still staying away from individual stocks  — with the exception of American Public Education Inc. (APEI), which I bought and sold in the span two days, because I wasn't convinced (although it was up over 5 percent on Friday). 

I've also resisted jumping in with both feet in terms of allocation to stocks, despite our rise of more than 6.5 percent in the Dow since hitting a low of 10,900 in mid-July. Jobs are still being lost, banks are still revealing their dirty secrets and retailers — even the discounters like Wal-Mart (WMT) and Target (TGT) — are reporting soft sales. 

Caution is still the rule of the day for me, even though the market of late seems to be saying that all is not lost. I believe the ETFs I hold give me a fairly broad exposure to the market while it sorts itself out. 

That doesn't mean I'm going to shun individual stocks. But with the volatility of late, these baskets of stocks help me sleep better. Here are the top five holdings of each, with the ticker symbols omitted for the sake of space: 

DIA: IBM, Chevron, ExxonMobil, 3M and Caterpillar. 

SPY: ExxonMobil, General Electric, Microsoft, Procter & Gamble and Johnson & Johnson. 

MDY: Arch Coal, Cleveland-Cliffs, Activision Blizzard, FMC Technologies and Pioneer Natural Resources Company. 

XLF: Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo and Goldman Sachs. 

I've also thought about adding a medical/health care component through an ETF like the SPDR Health Care Select Sector (XLV). 

Medical stocks have recently overtaken energy stocks in the first-place spot on Investor's Business Daily's sector performance ratings. 

Harvard endowment beats brutal market 

The Wall Street Journal reported last week that the Harvard University endowment, with about $35 billion in assets, returned 7 percent to 9 percent at the fiscal year ending in June — no small feat given the ups and downs of the market during that period. 

Most institutional investors posted lower or negative returns during the same period, the article noted. The Harvard endowment boosted returns by investing in commodities, Treasurys and hedge funds. Through part of the year, the endowment was headed by Mohamed El-Erian, who stepped down in December to go back to work at Pacific Investment Management Co., known as Pimco, according to the Journal. 

El-Erian just released a book titled, "When Markets Collide: Investment Strategies for the Age of Global Economic Change," which I just picked up, thanks to a Borders birthday gift card from my in-laws.

Brian

Stuck in fickle market doldrums

It didn't take long to get back into the doldrums this past week.

A mid-week ADP jobs report generated some optimism among traders, but that was quickly squashed on Friday with news from the U.S. Department of Labor that non-farm payrolls fell by 51,000 and unemployment had reached a four-year high of 5.7 percent.

But Friday's market didn't sell off like it could have given that news, as well as the lackluster - OK, pathetic - earnings and forecasts that have been reported.

That gives me hope that maybe we've reached some stability. One analyst on CNBC suggested we're skipping along the bottom.

A chart shows that the 10,962 low in the DOW we hit on July 15 has not yet been revisited. Hopefully that support can hold.

I remain committed to holding a set of ETFs I've blogged about in the last couple of weeks that give me a diversified expsosure to the Dow, S&P 500, mid-cap stocks and financials (details can be found in an earlier posting from a couple of weeks ago).

On Friday, I also nibbled at American Public Education Inc. (APEI), a provider of online post-secondary education.

Some analysts have suggested the stock is poised to do well because of the economic downturn. They suggest people laid off or in transition may seek American Public Education's services to help them facilitate a career change.

But as of Monday morning, I decided to sell the stock because it was getting hit pretty hard and had dropped nearly 5 percent in early trading. Too much for me, particularly in this market.

It's been less than encouraging on the stock buying frong with all the activity of late. But just remember, it has to go down to go up.

Better data for munis

The Securities and Exchange Commission is planning to start a free database that provides pricing and credit rating information on municipal bonds for individual investors, according to a recent story in the Wall Street Journal.

According to the story, the move is an attempt by the SEC to provide more clarity for investors in municipal bonds due to "major shortcomings" in accounting rules for municipalities.

"It's the first real initiative to get retail investors information easily," Frank Chin, chairman of the Municipal Rulemaking Board, told the Journal.

Individual investors own about$1.86 trillion in municipal bonds, according to the article.

The SEC is currnently operating a pilot program of the municipal bond information data service at http://emma.msrb.org.

Brian.