Buying a Dollar for $0.90

Long term readers know I am a big fan of buying closed-end funds at discounts and selling them at parity. Closed-end funds are one of the least efficient areas of the market, and many can and do trade at very large discounts to their NAV. is a good resource here.

It was with great interest when a reader brought it to my attention that there is an ETN that invests in closed-end funds trading at a discount.

Fact Sheet for the underlying index here.

Ticker Symbol is GCE.

The average discount of the top 5 holdings is around -10%.

Cohen and Steers also has a closed-end FOF but it trades as a closed-end fund and can also trade at a discount (in effect getting a double dip). It got as low as about a -8% discount but is back to parity. Quant Investor had a nice article here.


With the Dogs of the Dow on their way to their worst year ever, I wonder if it is a good time to put some money into the closed end fund that track the Dogs strategy (DSF) as it is trading at a -4% discount?

While we’re on the topic of dividends, why do you think Siegel uses them in his Wisdom Tree funds? From his very good book “Stocks for the Long Run”:

“But from a tax standpoint, share repurchases are superior to dividends.”

Results of the 2nd Book Cover Design Contest

35 entries of varying quality. . .Worth1000 book cover design contest.

What Will the 21st Century Look Like?

The markets are closed and I am outta here for some fish tacos, some beach, some surf, and some bbqing. If you need some weekend reading, here goes…

This post below reminds me of Question #2 from Fisher’s book:

“What can you fathom that others find unfathomable?”

Really interesting piece on market history from GFD Guide to Total Returns. From the doc:

“These facts allow us to make several general statements about investing in financial assets during the 1800s:

1. Most people invested in bonds, not stocks
2. Virtually all of an equity investor’s returns came in the form of dividends, not capital gains
3. There was little difference in the returns to stocks and bonds
4. Since the government did not issue treasury bills and deposits were not federally insured, there was no “risk free” investment available to investors
5. Bond and dividend yields declined over the course of the century as the risk to investors and inflation declined.
6. Although prices rose and fell in any given year, from 1815 to 1914, there was no overall inflation in the US and in most countries on the Gold Standard.

What is interesting about these points, which would have been taken as given before 1914, is that during the 20th Century none of these assumptions proved to be true. By the end of the 20th Century, most investors were investing in stocks, not bonds, depended on capital gains, not dividends, received a large premium on stocks over bonds, had risk-free investment alternatives, saw interest rates rise during most of the 20th Century, and suffered from the worst inflation in human history.

This makes us wonder how reliable the assumptions that investor make today will be for the next 100 years. Will everything that we assume to be true about investing today prove to be false by the end of the 21st Century, and why was it that the rules for investors changed so radically over the course of the 20th Century?”

Without poaching too much from the site, a few more great quotes from Ten Lessons for the Twenty-first Century Investor by Dr. Bryan Taylor:

In the 1970s, when Asian markets were emerging, they also displayed these volatile tendencies. The Hang Seng index rose 880% between 1971 and February of 1973, only to collapse 91% by the end of 1974. Poland, Russia and other stock markets went through similar bubbles and crashes when they emerged from Communist rule in the 1990s. Market timing is everything in these markets.

You know I agree with him on the market timing comment.

If you could imagine how the 21st Century will be different, what would you speculate? Leave a comment. . .


Least surprising news item from today.


For the data junkies, a ton of Excel sheets with historical market returns over on Global Financial Data.


Interesting interview from the recent Futures magazine with John Williams from

“Look at the CPI for example. In its most popular use following World War II, when it became a cost of living adjustment for auto union contracts, the concept was to use it as a measure of a fixed basket of goods. Say you have a loaf of bread, a gallon of milk and a steak. You price them out one year, you price them out the next year and figure the percent change and figure out how much your income had to increase to maintain a constant standard of living. The key concept is a constant standard of living. That was the basic underlying premise of the CPI. At the end of the 1980s, Alan Greenspan and Michael Boskin , who was head of the Council of Economic Indicators, started a campaign to convince people that it was being overstated. The argument was, if steak goes up, people are going to just buy more hamburger ; if they buy more hamburger their cost of living will be less. It was completely contrary to the concept of the CPI because it took it away from being a measure of a constant standard of living to being a measure of a declining standard of living, which has no practical purpose other than its express purpose to reduce cost of living adjustments in Social Security. It was a way for Congress to contain Social Security payments without doing the unthinkable and vote against it. The concept didn’t fly at that time, but when you got into the Clinton administration, the Bureau of Labor statistics introduced geometric weighting of the CPI for the purposes of mimicking a substitution-based CPI such as Greenspan and Boskin had been advocating. So with the geometric weighting, if something goes up in price it gets a lower rating and if something goes down in price, it gets a higher weighting so it has the effect of giving you lower inflation than you would have had otherwise. The net effect of this over time was effectively 3% and it is accumulative in its effect. If the changes had never been made, Social Security payments would be roughly double what they are today so the intended purpose worked.”

His primers on government economic reports:

1. Series Master Introduction
2. Employment and Unemployment Reporting
3. Federal Defecit Reality
4. CPI
5. GDP

Mean Reversion After Bad Months

Does your investment approach have you in the dark? Feel like having an advisor or portfolio manager is like the blind leading the blind? Maybe it is time to take control of your portfolio with a systematic approach.

I have talked a lot about various strategies for systematic trendfollowing and mean reversion on World Beta. In “Time to Put Money to Work” we examined what happens after really bad months in asset classes.

What were the key take-aways?

- It does not pay to buy an asset class after a really bad month for the following 1 month.

- 12 Months later the return is not much different than average.

- 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month. That annualizes to about 10% per annum.

A simple strategy would be:

After an asset class has a terrible month (ie MSCI EAFE in January), wait a month then take a 2 month position. i.e. buy March 1 with a two month hold. Investors could simply overweight a position or use options.

That post performed nicely. Buying March 1 with two month hold (using the iShares EFA), I show a return of 5.9%, and foreign emerging (EEM) would have done about 5%, and foreign REITs (RWX), would have done about 4.9%.

June was pretty awful in US Stocks, Foreign Stocks, and REITs in particular (returns at the end of the post). A simple strategy would be to wait a month, and then buy August 1st for a two month hold. Corresponding ETFs include SPY, IWM, EFA, EEM, IYR, and RWX (and there are plenty of substitutions). I consider the trigger to be -10% in equity-like asset classes, and -5% in US bonds. One could also drill down this model into smaller asset classes, but I have not tested the short term mean reversion there. Some truly awful performances for June include:

Financials (XLF)
Netherlands (EWN)
Sweden (EWD)
India (INP)
Infastructure (MG)
Private Equity (PSP)
Foreign Private Equity (PFP)


Do you know the only commodity market where futures trading is banned?


Of the last 10 GMs hired in MLB, 6 have been age 40 or under.


This book looks interesting, but 500 pages about booze? Drink: A Cultural History of Alcohol


I could watch the TED talks all day. Chris Jordan: picturing excess.

The Dow Gets Mauled

Officially a bear market folks (in the Dow). Before you panic, it is worth taking a look at the historical data. A -20% decline happens every 3 or 4 years so it is not that unusual. The Dow ETF is DIA.

Since 1900:

There have been 31, now 32, declines of -20% or more in the Dow (it takes 3 years at 10% returns to get back to even)
There have been 17 declines of over -30% (4 years to even)
There have been 10 declines of over -40% (6 years)
There has been one decline of over -50% (8 years)

Now that the market is down -20% from the highs, the better question is: “How bad is it going to get”?

While not for everyone, a tactical approach certainly looks like the right choice right now (just like it always looks like the wrong choice in bull markets).

Commodities and Inflation

The stock markets are very close to bear territory (one more day like today and it will be an official bear market in the S&P 500). I love this Bev Doolittle painting so I had to repost it.

Long time readers know I am a big fan of commodities. After today’s dump in stocks (and run up in commodities indexes) I thought I would write a very brief post that is similar to the post I did a few weeks ago on asset allocation and interest rates. I think this table speaks for itself.

It shows the average return to five indexes over two periods. 1972-1981 is characterized by rising interest rates and high inflation. 1982-2007 is characterized by falling interest rates and low inflation. Note the only asset class that performs better in the latter. In periods of low inflation and declining interest rates stocks, foreign stocks, bonds and REITs all performed better which makes intuitive sense because they are all capital assets and benefit from lower interest rates. Commodities on the other hand, turn in much higher returns when interest rates are going up, which makes sense due to their correlation with inflation and unexpected inflation.

If you don’t have commodity exposure (or your portfolio manager doesn’t), why not? That is probably a hard question to answer right now. Some example ETFs are: DBC, GSP, GSG, DJP, RJI, DBA, DBB, DBE, DBP.

Click on the table to enlarge.

Book Cover Design Contest

Here are three designs from the first book cover design contest. I currently have another contest running on Worth1000 that you can view here. Please be honest with your opinions – leave a comment on what you like and don’t like. If you don’t like any, say so!




Does This Signal a Top in Commodities?

Kind of like PowerShares launching their private equity ETFs, does the slew of new commodity ETFs signal a top? In my inbox today:

iPath® Global Carbon (GRN)
iPath® Dow Jones-AIG Softs Total Return Sub-Index (JJS)
iPath® Dow Jones-AIG Precious Metals Total Return Sub-Index (JJP)
iPath® Dow Jones-AIG Aluminum Total Return Sub-Index (JJU)
iPath® Dow Jones-AIG Cocoa Total Return Sub-Index (NIB)
iPath® Dow Jones-AIG Coffee Total Return Sub-Index (JO)
iPath® Dow Jones-AIG Cotton Total Return Sub-Index (BAL)
iPath® Dow Jones-AIG Sugar Total Return Sub-Index (SGG)
iPath® Dow Jones-AIG Platinum Total Return Sub-Index (PGM)
iPath® Dow Jones-AIG Tin Total Return Sub-Index(JJT)
iPath® Dow Jones-AIG Lead Total Return Sub-Index (LD)


Goldman just launched the a mutual fund based on the Absolute Tracker Index (ART) Symbols GARTX, GCRTX, GRRTX, GSRTX, GJRTX.

Brochure here.

I have always been curious about the hedge fund indexes. Isn’t beta the one part of hedge funds you don’t want? I bet a simple allocation equally weighted of US Stocks, Foreign Stocks, Bonds, REITs, and Commodities performs better (especially after the 1.6% fee). Some of the share classes have loads as high as 5% (and why anyone would buy a load fund is beyond me).

Goldman’s site here.


Alpha Hedge Fund Hall of Fame

Who is added next? My money is on Thorp.


Looking for a new Summer cocktail?

My new favorite – The Palmoa. (Although I use grapefruit juice + soda rather than grapefruit soda).

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