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If you would like to see the video, Click here to watch.

This morning, another CNBC commentator blamed part of the market’s problems on some Quant funds that have gone south which has led to people liquidating their shares. I’d argue it is quite the opposite - the market is going south which is resulting in Quant fund underperformance. Due to the irrational nature of the market, Quant funds should be expected to perform poorly. This was a theme that I started to watch in August of last year.

If you would like to take a look at my post from August ’06, simply click here.

My take on Quant Fund performance (or lack there of it) is merely another indicator that we are in the initial stages of a bear market. Two things take place at market tops that handicap Quant strategies.

1. Market Breadth deteriorates meaning the majority of stocks decline while a few large names hold up the cap-weighted indexes.
2. Investors are irrational during inflection points.

Read the rest of this entry »

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Dear Clients,

In my October Update, I listed three fundamental reasons why I’m emphasizing SLV over GLD. Recently, I came across a fourth reason in an article on savehaven.com called Leveraging Gold with Silver by Roland Watson.

In his article Leveraging Gold with Silver , Mr. Watson argues that Silver is essentially a means of leveraging the price of gold. He says:

It may seem strange to call silver a gold derivative but that is essentially what it is. It may have its own unique fundamentals that distinguish it from gold but by and large when gold goes up, silver goes up and when gold goes down, silver goes down. However, being a derivative, when gold goes up, silver goes up higher and when gold goes down, silver goes down lower.

What I really appreciate about Mr. Watson’s work is that he went back and ran the numbers to determine the nature of the relationship between silver and gold and he discovered something that I find very encouraging for our portfolio. He discovered that not only is silver a leveraged derivative of gold over the long-term, but the amount of leverage that silver is providing over gold has been increasing gradually since 2003. Furtherfmore, according to his technical analysis, this trend should continue. He says:

…silver eroded as leverage to gold until [it bottomed at] 0.65 in June, 2003. The leverage from June 2003 has since risen to 1.54 today…Not only is silver outperforming gold, but also it is increasingly outperforming gold! If we extend [the] trendline it hits 1.80 by the end of 2010.

Therefore, according to Mr. Watson’s research, silver should outperform gold by 54% - 80% over the next 3 years.

As your investment advisor, I see this relationship take place daily. Movements in SLV are almost always larger in percentage terms than movements in GLD. Since I’m bullish on gold, emphasizing SLV over GLD allows me to use a smaller percentage of your portfolio to gain the total exposure that I’m looking for which allows me to put the rest of capital to use in other plays.

Here’s a link to Mr. Watson’s blogsite if you would like to check it out.
The Silver Analyst

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On last Friday, January 5th, Powershares in partnership with Deutsche Bank launched the following 7 commodity based EFT’s:

DBA - PowerShares DB Agriculture Fund (25% S, 25% KW, 25% C & 25% SB)
DBB - PowerShares DB Base Metals (33% AL, 33% LZ & 33% HG)
DBE - PowerShares DB Energy (25% CL, 25% NG, 25% HO & 25% RBT)
DGL - PowerShares DB Gold * (100% GC)
DBO - PowerShares DB Oil Fund (100% CL)
DBP - PowerShares DB Precious Metals * (80% GC & 20% SI)
DBS - PowerShares DB Silver * (100% SI)

Finally, there is a easy, simple and efficient way for the average investor to invest in commodities outside of a mutual fund that tracks a diversified index. The problem that I’ve always had with an index of commodities is that it assumes that all commodities are correlated similar to equities, which they are not.

On Sept 1, ’07, I liquidated my clients’ position in PIMCO’s Commodity Real Return Fund (PCRAX) because I was concerned about the prospect of energy and base metals (The fund is down over 8% since I liquidated it – insert “pat-on-the-back” here). PCRAX has approximately 33% and 20% exposure to energy and base metals, respectively. However, by liquidating the fund, we lost our exposure to agricultural commodities of which I was and still am bullish on.

Which is why I’m very excited about the offerings from Powershares as they afford me the opportunity to invest my clients in a specific sector of the commodity space and minimize exposure to commodities that I’m not in favor of. For my clients, I’ll be adding the PowerShares DB Agriculture Fund (DBA) to your portfolio (I would have already executed this trade but since I believe in maintaining a fully invested portfolio, I do not have any cash in your portfolio and therefore I have to decide what to liquidate in order to free up cash to make the trades). I’m very bullish on the “grains” and I think this will provide you with substantial gains over the next 12-18 months. It’s time for the agriculture commodities to catch up with energy, base and precious metals.

The only regrettable aspect of this fund is that it doesn’t include Coffee. I think Coffee has the most appealing risk/return parameters of all the agricultural commodities.

* Important Note regarding the Precious Metals funds: There is a notable distinction between the the Powershares DB Gold and Silver funds and the other Gold and Silver ETF’s available to investors [iShares Silver Trust (SLV), the iShares Comex Gold Trust (IAU) and Streettracks Gold Shares (GLD)]. The Powershares ETF’s own futures contracts on gold and silver where as their predecessor’s own the physical asset.

This has multiple ramifications for the investor. By using futures to gain precious metal exposure, PowerShares frees up a large portion of the fund to be invested in low-risk treasuries that earn interest which should offset the cost of the fund. However, these funds will also be susceptible to roll yield which can be negative or positive depending on whether the commodity is trading in contango or backwardation. On the flip side, some investors may appreciate the security of knowing that their fund holds the physical commodity just in case our financial markets have a complete meltdown.

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Is the Dow Jones Index (DJI) really at an all-time high?

Some might consider me crazy for posing such a question. Of course the DJI is at an all-time high over 12,3000! Back in 2001, the Dow previously peaked at 11,337 nearly 5% below today’s levels.

But there are those who would argue that the DJI is far from it’s historical highs and here’s why.

In dollar terms, the DJI is up marginally from its previous peak set in January of 2000 and it is up 65% since it bottomed on 10/9/2002. However, the DJI is actually down when priced in gold.

While the vast majority of people including the media, government and Wall Street price the market in dollar terms, there are some really intelligent economists out there who argue that the market should be priced in terms of hard currency (i.e. gold) and not fiat currency (US$). Here are the figures:

Asset………………….Jan ’00……….Oct ’02……….Dec ‘06
Dow…………………….11,723……….7,286 ……….12,300
Gold……………………..280…………..320………………630
DJI/Gold Ratio………41.9…………..23.8…………….19.5

Therefore, when you price the DJI in gold, it is actually down more than 50% since 2000 and down 14% from it’s bear market bottom in Oct of ’02. You’d have been better off buying Gold in late 2002 than the DJI and that would have been the best time to buy the DJI in nearly a decade. Just some food for thought.

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Market inflection points (tops and bottoms) are characterized by extreme irrationality on the part of investors. At The MAC, we track several indicators that measure how “irrational” the market is being. In June, these indicators turned decidedly bearish. However, they have recovered over the last couple of months which would mean that the market is acting more “rational” and signal that the likelihood of an imminent bear market is seemingly diminishing. However, before I turned bullish, or at least neutral, on the market I discovered a strange occurrence that has made me increasingly skeptical of this bull market’s ability to rage on. Read the rest of this entry »

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Over the last several days (4/30/05 – 5/3/05), the Dallas Morning News wrote a four part series called “Trade Secrets” which sought to expose some of the gross inadequacies of the brokerage business. I thought the article made some very salient points but failed to emphasize the real problem with securities brokers.

In my view, it all comes down to conflicts of interest. The more conflicts that exist the greater the chance of unethical behavior. Read the rest of this entry »