Popular Post Replay: The New Erkel

Originally posted on March 10, 2009...it seems more fitting today.

The Real Cost of Fees: Wall Street's Dirty Little Secret

I've been doing some research on portfolio construction using ETFs and decided to see exactly what impact fees have on a portfolio.  The portfolios that I've been testing are very low fee--most of them have a total annual expense ratio of .25%.  To illustrate the impact of fees, I ran annual compounding rates of 10% and included different levels of fees over a 50 year horizon.

The results are staggering.  Wall Street has a dirty little secret and it's that Wall Street is designed to make firms money first and customer's money second.  Kind of like the classic book by Fred Schweb, Where Are The Customer's Yachts.  Given that the book was originally published in 1940, this secret isn't anything new, it's just that the industry wraps up the fees/commissions in new products and gives it a new marketing spin.  Whether it's called a management fee, an administration fee, a commission, a surrender fee, a front-end load, a deferred load, a 12b-1 fee, or an "other" (yes, I've seen a statement that said "other" next to the fee), it's all a way of making the firm money and slowly and quietly charging the client.  It happens more than most people think and most individuals are in products that have fees baked into the product that have other fees on top of them--for instance, the mutual fund fees that are inside a variable annuity that has its own fee.  Yes, most people reading the blog are not likely to have variable annuities in their portfolios, but tons of individuals have them and they usually don't even understand that it's an annuity platform and that they are getting fee'd to death.  Enough of my rant..let's look at the numbers.

 Here's a table that shows a portfolio starting with $10,000 that is compounded annually at 10% with the annual fees taken out.

Here's a graph of the results.

Here's a graph of the first 20 years zoomed in.  This is helpful for those that say it's too late, that they only have another 10-15 years before retirement...look, it still costs thousands and thousands of dollars.

So what is the solution?  Obviously, replace your mutual funds with low cost ETFs.  If your comfortable with it, replace your financial advisor with low cost ETFs.  There's no sense in having an advisor tack on another 1-2% on top of the fees just to put you in the product and re-balance it for you if you're able to do it yourself.  Some people like the help and want an advisor and I understand that, but many do not need it.

If you're interested in learning more about ETF portfolios, there are plenty of great online resources and books to learn from.  Look at John Bogle's book, The Little Book of Common-Sense Investing, or Mebane Faber's The Ivy Portfolio--both are great places to get started.

I hope everyone has had a great weekend.

TLT 

Summer Reading: Deemer on Technical Analysis and a TOS Code for His Break Away Momentum Indicator

This summer, I've been reading Walter Deemer's Deemer On Technical Analysis and it has been one of the best technical analysis books that I've read in a really long time.  Mr. Deemer gives his take on using TA for longer term investors and he shy's away from the ultra short term time frames that many modern trading books focus on.  He had a long career as a technical analyst and his book is chock full incredibly interesting and witty observations based on his own experiences from his career.


Deemer  not only breaks down what he feels is useful about TA, he also does a great job of explaining his beliefs on why the TA that he uses works.  You're not going to see pictures of massive charts with multiple indicators and squiggly lines in this book..he keeps his charts to the bare minimum of what he considers useful tools.  This book will likely be the book that I recommend to people when they ask me for a good book that can help them get started with investing/trading or with TA in genearl.  If you haven't read it yet, pick it up or order it for the kindle/ipad.  It's well worth the read.

As a bonus, I coded his Breakaway Momentum indicator for think or swim.  This indicator uses the NYSE advances and declines that are added together for the trailing 10 days and then a ratio is created of advances to declines.  To be breakaway momentum, the reading has to be above a 1.97.  These readings only happen once every 31 and a half years on average.  That being said, we had three in 2009..a bit of an anomaly and a testament to how oversold the market was after the 2008 meltdown.  For more info and historical recordings of breakaway momentum check out Mr. Deemer's website here.

Here's a chart, note TOS has some data issues with advance decline numbers starting in 2009 and going backwards, however, this indicator works well with recent data and you can still see the 3 breakaway readings in 2009..there are just some holes in the data that don't look pretty.

And here is the code for you thinkorswim fans:

####Delete this line when pasting in TOS####


declare lower;

input adv = "$ADVN";
input dec = "$DECN";
input length = 10;

def up = close(adv);
def down = close(dec);

def sumup = sum(up, length);
def sumdn = sum(down, length);

plot ratio = sumup/sumdn;

plot breakaway = 1.97;

####Delete this line when pasting in TOS####


Have a great weekend!

TLT

Divergence in Equities and Bonds

Was a weird Friday in the markets.  One thing that jumped out at me was that stocks were up and treasury yields fell...a bit of a divergence.

This is probably a good indication of the market's overall uncertainty as we head into a weekend with important elections.  I give it a strong chance that the market merely reacts and quickly corrects back to pre-election levels to the outcome of the Greek election with a small chance of everything hitting the fan.  The lowering of yields was likely the institutions protecting themselves from the "hitting the fan" scenario.  We'll see.

TLT

Yikes...

France is having some employment problems...not an uncommon problem for many countries today.  It's not the employment problem that is scary, it is the socialist president's ideas of how to suppress further unemployment that is down right terrifying.  Here is a section from this article:

Employment statistics from France reinforced recent data showing a slowdown in the European labor market. The jobless rate in metropolitan France rose in the first quarter of 2012 to 9.6 percent, up 0.3 percentage point, the national statistical agency, Insee, reported.
 Faced with the growing jobless problem, the new Socialist president, François Hollande, is planning new rules to make it more expensive to lay off workers, the a French minister said Thursday.
 Labor Minister Michel Sapin told France Info radio that the government would try to make “layoffs so expensive for companies that they’re not worth it.”

Way to go France.  Looks like you have a real winner on your hands.

TLT 

Late in the Day Turn Around for Stocks

The buying this afternoon gave the first long set up that I've seen in a while.  It's likely that lots of traders are looking to trade a bounce, the only question is will it bounce now or later.

Stocks are pretty much oversold across the board and the run up in bonds in crazy to say the least.  We'll probably see a good bounce this week, unless there's significant news from Europe that drags the market down.  The key indicators to be watching are bonds (TLT) and the Euro (FXE).  Note that even when stocks were negative earlier today, the euro was still up and bonds were still negative...that was a good sign play the market to the long side.

We'll see what happens.

TLT

Current Watch List

Here are 7 stocks that I have on my watch list.  These stocks have been flagged by my screener because of their technical strength and their high relative strength compared to the overall market.

The above charts are weekly charts, which is a good way to keep track of trending stocks.  I like ECL and AMGN in particular.

Hope everyone's having a great weekend.

TLT

General Update and a ThinkScript Code

I almost let an entire month go by without posting...just a sign of how busy (crazy) my world is right now.  Recently, I opened up a Title Company and that has been eating a lot of my time.  Generally, you won't hear me comment on real estate because this blog is about trading, however, the title company is a play on the overall real estate market.  Here in North Texas, real estate is really beginning to pick up.  Real estate agents are seeing lots of activity on the residential side and commercial spaces are filling back up as well.  The title company seemed to be the most direct way to really profit from a rebound.

On the trading side of things, I've been working on a couple of mechanical strategies that are designed to be traded with a basket of commodities.  Nothing too fancy, a simple trend following model and a mean reversion model.  The hard work is in determining how to measure different markets to establish which commodities to include in each system and then how to allocate to each system as a whole.  For example, if my measurements are telling me that volatility is steadily declining and certain commodities are trending, then I may allocate 65% of the overall portfolio to the trend following system and 35% to the mean reversion.  Sounds easy enough, but developing and testing rules is a tedious process.  I'll be providing some posts on this is the future.

Over the past month, I've been in talks with a local hedge fund manager that runs an options trading fund.  He has an interesting strategy that returned about 7% this month...generally he targets 1-2% a month but the volatility in the beginning of April really helped him out.  We are working out a deal that involves a couple of entities partnering up to form a new fund that trades a "Collared Dividend" Strategy.  If this comes together, the new fund looks like it will have $30-50 million to trade by the end of July.  At this point, this might be a pie-in-the-sky dream because there are many working parts that still need to get figured out...but, the thought of managing some institutional money sure is exciting.  

Before I sign off, lets take a quick look at the market.  Below is a chart of S&P 500 via SPY, and it has my Spec Stocks Indicator attached to it.  The premise is pretty simple:  select 6 stocks that are popular and speculative and take a measurement of the trend for each stock.  Then put it together and take an average of them.  These stocks tend to lead the market and be indicative of investors' willingness to take on risk.  Here's the chart:

And for any thinkorswimmers out there, here is the ThinkScript code:

//

declare lower;

input symbol1 = "aapl"; 

input symbol2 = "goog";

input symbol3 = "bidu";

input symbol4 = "cmg";

input symbol5 = "nflx";

input symbol6 = "pcln";

input malength = 200;

input malrlength = 5;

input shortmalength = 50;

input longmalength = 200;

def S1 = close(symbol1, period = "Day");

def S2 = close(symbol2, period = "Day");

def S3 = close(symbol3, period = "day");

def S4 = close(symbol4, period = "day");

def S5 = close(symbol5, period = "day");

def S6 = close(symbol6, period = "day");

def ma1 = ExpAverage(s1, malength); 

def ma2 = ExpAverage(S2, malength);

def ma3 = ExpAverage(S3, malength);

def ma4 = ExpAverage(S4, malength);

def ma5 = ExpAverage(S5, malength);

def ma6 = ExpAverage(S6, malength);

def MALR1 = linearRegressionSlope(ma1, malrlength);

def MALR2 = linearRegressionSlope(ma2, malrlength);

def MALR3 = linearRegressionSlope(ma3, malrlength);

def MALR4 = linearRegressionSlope(ma4, malrlength);

def MALR5 = linearRegressionSlope(ma5, malrlength);

def MALR6 = linearRegressionSlope(ma6, malrlength);

def MALRMAShort1 =expAverage(MALR1, shortmalength);

def MALRMAShort2 =expAverage(MALR2, shortmalength);

def MALRMAShort3 =expAverage(MALR3, shortmalength);

def MALRMAShort4 =expAverage(MALR4, shortmalength); 

def MALRMAShort5 =expAverage(MALR5, shortmalength); 

def MALRMAShort6 =expAverage(MALR6, shortmalength); 

def MALRMALong1 = expAverage(MALR1, longmalength); 

def MALRMALong2 = expAverage(MALR2, longmalength);

def MALRMALong3 = expAverage(MALR3, longmalength);

def MALRMALong4 = expAverage(MALR4, longmalength);

def MALRMALong5 = expAverage(MALR5, longmalength);

def MALRMALong6 = expAverage(MALR6, longmalength);

Def BuySell1 = if MALRMASHORT1 > MALRMALong1 then 10 else -10;

Def BuySell2 = if MALRMASHORT2 > MALRMALong2 then 10 else -10;

Def BuySell3 = if MALRMASHORT3 > MALRMALong3 then 10 else -10;

Def BuySell4 = if MALRMASHORT4 > MALRMALong4 then 10 else -10;

Def BuySell5 = if MALRMASHORT5 > MALRMALong5 then 10 else -10;

Def BuySell6 = if MALRMASHORT6 > MALRMALong6 then 10 else -10;

plot SpecScore = buySell1 + buysell2 + buysell3 + buysell4 + buysell5 + buysell6;

plot zeroline = 0;

assignPriceColor(if specscore > 0 then color.green else if specscore < 0 then color.red else color.blue); 

//

Have a great weekend.

TLT

LIBOR Spreads Say, "Bull On"

Spreads between the 1 month and 3 month LIBOR, one of my favorite gauges of market risk appetite are very bullish right now.  Take a look at the chart:

Have  great weekend!

TLT

Wisdom Quote

"Making a few correct calls using only a bottom-up strategy may influence investors to think that they are great stock pickers.  In reality, it's more likely that they have just been on the right side of macro trends without realizing it, such as choosing stocks from a sector that was in favor."

--Fracois Trahan

from The Era of Uncertainty

by Francois Trahan and Katherine Krantz

Stock Market Still in an Uptend..despite what the financial news says

I think most traders and investors too, eventually realize that at a minimum, financial news needs to be taken with a grain of salt and more likely just needs to be ignored all together.  I've started seeing the bearish headlines and concerning stories pop up but when I pull up my charts, all I see is a nice trend that is taking a much needed breather.  Here's the S&P:

I believe Jesse Livermore said something to the effect of he learned to make big money by sitting on his hands..something like that.  What he meant was that timing every wiggle of the market is generally a losers game...the big money is finding a trend and then riding it until it's done.  As you can see from the chart above, my system says the trend is still up, so I'm staying long with stock..plain and simple.

On a separate note, I stumbled across this blog today http://share-tos.blogspot.com/.  It is filled with all sorts of ThinkorSwim codes that the authors share.  If you're into tos, it might behoove you to go spend some time at the blog..I know I will.

TLT

Euro is in a Box

The Euro is stuck in a pretty tight trading range (aka a box) as the world watches the EU to see how they handle all of the mess regarding Europe, Greece, etc.  The buying pressure, or lack of selling over the last couple of weeks, has been tripping buy signals on some of my systems and neutral signals on others.  I'd imagine a bunch of other systems are seeing the same thing.  The important thing to note is that all of these systems were giving sell signals only 2 weeks ago.  So where do we go from here?

Discretionary traders or classic charting traders will be looking for a break of the trading range (see the blue box on the chart below).  A good amount of professionals will be looking for any sign of weakness after a break higher in order to fade the move (short the euro).  I'm currently long the euro b/c that's what my system is saying to do.  Another thing I like to look at in these situations is the Commitment of Traders Report (or C.O.T.).  The C.O.T. is a report of positions of Commercials (big hedgers), large traders (traders holding large positions) and small speculators.  Until recently, the commercials and large trader reports were still bearish, but in the recent report, we saw the first bullish sign in quite a while.  Here's the chart:

When I see a tight trading range and then a change in the COT, I follow signals that are in the same direction as the COT.  Commercials will begin selling (b/c they are hedging so a bigger number is bearish and a smaller number is bullish) and large traders will be buying..and I'm looking to buy as well.  I generally ignore the small speculators number.  There's probably something to be gleaned from it, but I don't use it.  If you're interested in looking at these types of charts, here is a great free website for it.

Have a great weekend.

TLT