Stock Performance Since April 1st

Here is the S&P 500 performance, by industry, since the beginning of April:

S&P 500                                     +14.3%

IT                                                              +12.3%

Industrials                                                 +21.7%

Consumer Discretionary                             +18.3%

Materials                                                   +16.5%

Energy                                                       +13.6%

Financials                                                  +40.1%

Healthcare                                                   +4.0%

Consumer Staples                                        +7.7%

Utilities                                                        +2.7%

Telecom                                                      +1.0%

The results are pretty much as one would expect for an up market.  The economically sensitive stocks have done very well.  The defensives, though up have lagged behind the index badly.  The only apparent anomaly is IT, which has lagged the index slightly.  This is an S&P sector that contains an unusual mix of very mature companies that have very little growth and more vibrant firms that better fit the image of  high-tech.   The first camp includes MSFT (#1 in tech market cap), IBM (#2), and CSCO (#4), all of which have underperformed the S&P.  The second has AAPL (#3) and GOOG (#5), which have outperformed.  My guess is that MSFT will continue to be a drag on IT sector performance, but that the others will perk up as business spending improves.

I’ve been pleasantly surprised by the continuing resilience of world stock markets.  I still think that it’s reasonable to expect 10-15% more upside in the next six months or so.  More important, I think the pattern shown above, of outperformance by economically-sensitive sectors and underperformance by defensives, will continue.  At some point, however, the market will begin to focus on the negatives surrounding the financials and their outperformance will likely cease.  My preference has been to concentrate on financials with emerging markets exposure, but that’s just me.  This is also a structural decision for me, since I know financials are not my strong suit.

ETFs vs. Mutual Funds (III)-Actively-managed funds

Similarities between actively-managed ETFs and mutual funds

Actively-managed ETFs have been allowed by the SEC since March 2008.  Like actively-managed equity mutual funds, they fall into two types:

1.  quantitative funds–that is, the fund sponsor creates a set of decision rules that are implemented without exception, typically by computer.  The set may be simple, like:  own equal dollar amounts of each of the 100 largest-capitalization stocks in the S&P 500.  Or the rules might be more complex, with constraints on allowable book value, historical growth rates, consensus earnings estimates and other variables.  There will also doubtless be a sub-rule dealing with borderline cases, to prevent having to trade in and out of a stock that flip-flops between #100 and #101.  Otherwise, the “active” here consists in executing the rules.

2.  “traditional” actively-managed funds–which make use of the subjective judgment of portfolio managers.  These managers are supported in larger organizations by a staff of, among other possibilities, in-house securities analysts, quantitative analysts or an investment committee that creates an “approved list,”  which specifies the only securities the manager is allowed to have in his portfolio.  Discretion given to the manager in forming strategy and selecting stocks runs the gamut from the manager having total control, on the one hand, to being more or less a client relationship manager for a portfolio structured completely by computer or investment committee, on the other.

You can find the general structural similarities in my earlier posts on ETFs vs mutual funds.  The differences?

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Asian Economic Development Model–China

Socialism with Chinese characteristics–i.e., capitalism

Sometime in the late Seventies, the Politburo of the People’s Republic of China, led by Deng Xiaoping, decided that central planning had to be abandoned as the tool shaping the economic progress of their country.  Deng concluded that it should be replaced by the Asian Economic Development Model.  Why?

The Politburo felt it had no other economic choice.  Despite the negative effects of the Great Leap Forward and the subsequent Cultural Revolution, China had become too big and complex for central planning to be effective (if it ever was, even in a small and simple economy).  The Politburo also saw the gradual deterioration of the Soviet Union and didn’t want to follow in its footsteps.  In contrast, the examples of Japan, Korea, Singapore and Hong Kong all showed that the Development Model worked. Continue reading


What they are…

Convertibles are in a lot of ways vintage Wall Street.  They are securities that can be converted into, or exchanged for, something else.  Anything more than that is a function of the imagination of the issuers and the willingness to buy of potential holders.

Convertibles can be debt or preferred equity.  They usually convert into common stock of the issuer, but there have been instances where they convert into common shares of another company, or into something else..  To keep things simple, I’m going to assume in what follows that the convertible is exchangeable into common stock of the issuer.  I’ll say something about the unusual case of other kinds of conversion at the end. Continue reading