The Big Picture | Index/ETFs

When Does GM Get Kicked Out of the Dow, part II

Thursday, June 26, 2008 | 02:00 PM

With GM now at 53-year lows, its time to revisit the question. Back in November, we asked "When Does GM Get Kicked Out of the DJIA?"

Let's start a pool: At what point in the future will General Motors (GM) ignominiously join Eastman Kodak (EK), Woolworth and others and get tossed out of he Dow Jones Industrials? And, who will replace them?

I am betting this happens within 5 years, and perhaps even within 3.

As to the replacement, I might have said Google (GOOG) -- but I assume the DJ Editors learned their lesson top ticking Microsoft (MSFT) and Intel (INTC). Instead, my bet will be Cisco (CSCO).

Did I say three - five years? Let's change that to 12-24 months and I still think its Cisco over Google . . .

~~~

Barron's Asks: Bear Market Rally?

Saturday, June 07, 2008 | 12:00 PM

in Index/ETFs | Technical Analysis | Trading

In Barron's The Trader column, Kopin Tan asks: "Is the Stock Market's recent resurgence just an ephemeral, bear-market rally?"

Before answering that, have a look at the chart at right. It accompanied his questions; the black lines are my own.

There are several things to be gleaned from this:

First, the Nasdaq remains the healthiest of the major indices. Thats could be due to strong sectors within it (i.e., Enterprise Software). Or it could be due to specific stock leadership, namely -- Google (GOOG), Apple (AAPL), Research in Motion (RIMM), or Baidu.com (BIDU).

Second, the down trend seems to be not yet quite vanquished. What was described by some as a breakout is now looking like it could turn out to be a false breakout.

Third, the SPX and Dow are at critical levels -- a failure at the trend line likely means more downside to come. And, the recent May highs appear to be a lower low to this old traders eyes. Any failure at this level means more trouble ahead.

Last, a further failure at the March lows would be disastrous for the indices.

Your mileage may vary . . .

Source:
Oil, Unemployment Rise, Stocks Fall
KOPIN TAN
Barron's June 9, 2008
http://online.barrons.com/article/SB121279288358653337.html

Odd Data Point: Tech Passes Finance in SPX

Wednesday, May 21, 2008 | 10:50 AM

in Earnings | Finance | Index/ETFs | Markets | Valuation

How is this for an odd data point? Bank stocks are no longer the largest industry group in the SPX, having been recently bypassed by Technology.

That's according to this article by Bloomberg News:

"Bank stocks lost their position as the biggest industry group in the Standard & Poor's 500 Index to technology companies after tumbling 31 percent since 2006.

Computer and software makers led by Microsoft Corp. and International Business Machines Corp. accounted for 16.26 percent of the benchmark for large U.S. companies based on yesterday's closing prices. Financials, led by Bank of America Corp. and JPMorgan Chase & Co., fell to 16.19 percent.

Banks slid the most among 10 industries in the S&P 500 last year [-21%] and are the worst-performing group so far in 2008, as lower U.S. real-estate prices led to losses on mortgage debt and derivatives approaching $380 billion globally...

Financial shares in the index declined almost 21 percent in 2007, their worst year since a 24 percent drop in 1990. They have plunged 31 percent since the end of 2006."

I saw that and wondered if this might be some sort of a contrary indicator. I may actually have to pull all of the prior leadership changes in the SPX500, and other indices, and see if there is any significance. I would be curious to see if perhaps there might be a paired trade (i.e., Long Finacials, short Tech)

Regardless, in the S&P500, its now Banks #2, Tech #1.

Source:
Drop in Bank Stocks Leaves Technology Biggest S&P 500 Industry
Elizabeth Stanton
Bloomberg, May 21 2008
http://www.bloomberg.com/apps/news?pid=20601213&sid=adD4MfoIscYo&

Updating the Dow (top ticking Energy?)

Monday, February 11, 2008 | 10:37 AM

in Index/ETFs | Markets | Technical Analysis

The editors at DJ have made a few changes to the venerable index: Out are Honeywell (HON) -- which I have owned since the GE deal fell apart, and Altria (MO) which I sill have a small position in from the late litigation era.

In are Chevron (CVX) and Bank of America (BAC), which I don't. The charts of the buy and sell signals below are rather interesting.

The adds of Intel (INTC) and Microsoft (MSFT) late in 1999 top ticked the tech boom. Will the Chevron add do the same for energy?

Here's the WSJ:

"Dow Jones & Co. announced that Bank of America Corp. and Chevron Corp. will replace Altria Group Inc. and Honeywell International Inc. in its benchmark Dow Jones Industrial Average effective Feb. 19.

The change is the first in four years and reflects the index's continued shift away from industrial firms and into other sectors such as energy and financial services.

Excluding thinly traded Berkshire Hathaway Inc., Bank of America and Chevron are the two biggest U.S. companies by market capitalization which currently aren't in the Dow industrials."

Interestingly, I noticed our ratings on both drops were "Neutrals"; the adds were split: BAC was a buy, CVX was a sell . . . charts after the jump.

Continue reading "Updating the Dow (top ticking Energy?)"

Russell Indices Rebalance Today

Friday, June 22, 2007 | 03:00 PM

in Index/ETFs | Investing | Trading

As if the "well-contained subprime mortage" issue wasn't adding enough volatility, today is the Russell Indices rebalancing.

Newly re-constructed Russell indices (Global, 1000, 2000, 3000 and Microcap) will take effect after the the NYSE close at 4pm. Based on preliminary Russell information, 154 NYSE-stocks will be added or deleted to the indices.

This tends to play a little havoc with prices, above and beyond today's volatility.

We most recently looked at the S&P500 trivia on the occasion of their 50th anniversary. Here is some Russell trivia:

• The Russell 3000 (combined market cap) reflects about 98% of the investable U.S. equity universe, increased more than $3 trillion (from $15.3 to $18.5 trillion).

• The Russell Global Index includes more than 10,700 stocks from 63 countries.

• Countries with the largest number of additional companies joining the index include Australia (109), the United Kingdom (93), Hong Kong (92), Canada (90) and India (66).

• There are 277 "additions" for the Russell 3000 -- more than last year's 237 additions, but far less than the 10-year average of 405.

• A third of this year's additions are in two sectors: financial services (57) and health care (48).

• Sector changes (weighting):
-Energy services sector will increase (3.9% to 4.6%)
-Health care sector will decline (12.1% to 11.9%).
-Financial services (22.4%) and Consumer discretionary (13.4%) are the largest sectors.

• Turnover is between 2% and 2.5%,

• A total of 128 IPOs will join the Russell 3000 this year; In 2006 new IPO adds = 122; In 2003, it was = 28.

• Of the 310 companies going into the Russell Microcap Index, 67 are dropping into the index from the Russell 3000.

• 184 companies will completely leave the Russell's index universe entirely.

The final membership lists for the Russell 3000, Russell 2000 and Russell 1000® will be posted June 25.

UPDATE: June 24, 2007 7:11am

Paul points to this ITG chart, showing a very modest number of adds and deletes for the Russell 2000:

Source:
Russell Set to Restock U.S. and Global Indexes
Tacoma, WA — June 11, 2007
http://www.russell.com/News/Press_Releases/PR20070611_US.asp

Crude Remains Strong Despite Inventory Build

Wednesday, June 20, 2007 | 03:30 PM

in Commodities | Energy | Index/ETFs | Psychology/Sentiment | War/Defense

Light Crude Oil (CL, NYMEX)
Daily Commodity Futures Price Chart: July, 2007

chart courtesy of TFC Commodity Charts

Crude closed at $68.86 (August 2007) today -- down 68 cents -- and the new futures contract starts tomorrow.

Since I have been ranting today -- I remain firmly convinced that:

- Energy is not only a matter of economics, but a matter of National Security;
- Subsidies for Oil and Ethanol need to be replaced with subsidies for Solar;
- CAFE standards need to be raised;
- Expedited processing for Nuclear Power plant permits should be issued

I own a V8 (automatic), a straight 6 (6 speed), and a 4 cylinder (5 speed) -- so I am the last person to preach we all need to shift to Vespas and biofuels. But its pretty apparent to even a gas hog like me that we need to do something other than send billions of dollars to terrorist nations each and every single month.

Source: Pat Oliphant via Yahoo!

Looking at the S&P500 (Relatively)

Monday, May 07, 2007 | 05:57 AM

in Commodities | Currency | Index/ETFs | Investing | Markets

Last week, we looked at the question Which is Performing Better, the Dow or the S&P500 ?

A significant difference between the two indexes is how they are computed -- the Dow is price-weighted, while the S&P500 is market cap-weighted.

The higher priced Dow stocks (Boeing, United Technology, Catepillar, 3M) have a disproportionate impact on that index. On the SPX, the biggest cap stocks -- Exxon Mobbil, GE, Citigroup, Microsoft, AT&T -- are (literally) the heavyweights. GE and Microsoft, at about $37 and $30 respectively, have only a modest impact on the price-weighted Dow. Yet on the cap-weighted SPX, the $382.2 and $292.4 billion dollar respective caps have an enormous impact.

That was last week. This week, Floyd Norris takes a different tack: looking at the SPX in various weighs based on different measures:

"It has taken 88 months, or nearly three-quarters of the decade, but the American stock market is finally back to where it ended the last decade.

At least that is true if one measures stock performance in the traditional way, using dollars. As the chart accompanying this column indicates, the Standard & Poor’s index of 500 stocks ended April a full 1.1 percent above its level of Dec. 31, 1999.

Unfortunately for those who owned American stocks during that period, the dollar itself has not been a star performer. As a store of value, the buck is having a bad decade.

The charts show how the S.& P. has performed against some other currencies, and against some alternative investments:"

Charts are below:

click for larger chart

Charts courtesy of NYT
>

Against the Japanese yen, S&P500 is up 18 percent during this decade. But in British pounds, its down 22%. Even worse, in Euros, the SPX lost a third of its value.

The impact of inflation on commodity prices is even more stark: Compare what a unit of S&P500 bought at the end of 1999 versus today. The S&P500 index buys only 58% as much corn, only 57% as much house (based on the Case-Shiller index) as it used to, only 40% as much Oil, and only 32% as much gold as it did in 1999.

This isn't to suggest that the Index has moved up over the past few years; it obviously has. But it also reveals two fascinating factors: Iy shows how important relative performance of any asset class is; and secondly, it demonstrates how pernicious the effect of inflation has been. No wonder its called the cruelest tax.

Source:
A Comeback for the S.&P. (If the Yardstick Is Dollars)
FLOYD NORRIS
NYT, May 5, 2007
http://www.nytimes.com/2007/05/05/business/05charts.html

Which is Performing Better, the Dow or the S&P500 ?

Saturday, April 28, 2007 | 10:45 AM

in Data Analysis | Index/ETFs | Investing | Markets

The short answer is, depends on how you calculate it.

The results of looking at these two indices from various angles may surprise you.

The Dow is at an all time high, the S&P500 a few percent below. But it turns out that, as a whole the SPX is doing much better than the Dow.

The New York Times' Floyd Norris gives us the details:

"The Dow is normally calculated as a price-weighted index, meaning that stocks with the highest price for a share get the heaviest weighting. That is largely a historical accident, as it was the easiest way to do it in the 19th century, when the best calculator available was a person with a pencil.

The most common method of calculating indexes is by market capitalization, in which the companies with the largest market value count for the most. The chart [below] shows how the Dow would look if it were calculated in that manner, instead of the other.

While the Dow is up 18 percent from March 24, 2000, when the S.& P. peaked, it would have been down 8 percent had market capitalizations been used in the computation. That reflects the fact that some of the Dow stocks that did the worst, including General Electric, Microsoft, Intel and Pfizer, are large capitalization stocks that had relatively low share prices. That meant they had little impact on the Dow as normally calculated, but a large effect on the Dow as computed using capitalization figures."

What about equal weight computation? Hasn't that ETF (RSP) out performed the standard S&P500? Glad you asked -- yes, yes it has:

"The third method often used in index calculations is one of equal weighting, which assumes that one puts the same dollar value into each stock in the index.

The chart [below] shows that the S.& P. 500, calculated by market capitalization, is still 2 percent below where it was on March 24, 2000. But that reflects poor performances by some of the same very large companies that starred before 2000 and have not done as well since. Calculated by equal-weighting, the S.& P. 500 is 82 percent higher than it was in 2000."

The following charts show Dow and S&P500 performance since March 24 2000 (the day the S&P500 peaked):
>
click or much larger graphic

Graphic courtesy of NYTimes;
Sources: S&P, Bloomberg

>
>

It would be interesting to see a price-weighted version of the SPX, or a an equal-weighted version of the Dow.

Norris adds that by the market capitalization version makes clear that "the Dow has underperformed, even if it is the Dow that is the index setting records these days."

Of course, all of these measures are domestic. Measured in euros, the price-weighted Dow is 15% lower than its 2000 peak . . .

Source:
The Dow May Be at Its High, but Its Performance Is Still Lacking
FLOYD NORRIS
NYT, April 28, 2007
http://www.nytimes.com/2007/04/28/business/28charts.html

Index Gains Distribution

Monday, April 23, 2007 | 11:55 AM

in Index/ETFs | Investing | Markets | Technical Analysis

All major indices posted healthy gains last week.

The blue chips led the way, while the Nasdaq Tech issues and Russell 2000 small caps lagged. Financials, which had been conssitently poor, showed signs of life. Exporting beneficiaries of the weak dollar -- think industrials like Honeywell (HON) and Caterpillar (CAT) -- had strong earnings.

Its interesting to note, however, that these gains were not evenly distributed. The Dow was the only index in the green everyday last week. Econoday uses a very attractive form of info-porn:

50th Anniversary of the S&P 500

Tuesday, March 06, 2007 | 09:00 AM

in Index/ETFs | Investing | Markets

We normally never do press releases -- I find they are pretty worthless, and given the sheer ignorant laziness of the PR flacks who send us outrageously off topic garbage, they all get deleted (99% of them unread).

But there were so many interesting details in this one that we succumbed to its numerological charms.

Here now, some fascinating trivia about the S&P500:

The S&P 500 was launched on March 4th, 1957.

Closing price on March 5, 1957 = 44.42

Average closing price since 1957 = 377.69

Average point change since 1957 = 0.11

Average percentage change since 1957 = 0.03%

S&P 500 closed up 6,608 days; average gain = 2.71 or 0.63%

S&P 500 closed down 5,900 days; average loss = -2.80 or -0.64%

73 days of no change in the price of the S&P 500

Best one day point gain = March 16, 2000, +66.33

Worst one day point loss = March 14, 2000, -83.95

Best one-day percentage gain = October 21, 1987, +9.10%

Worst one-day percentage loss = October 19, 1987 -20.47%

Average yield = 3.19% (currently 1.73%)

Average P/E on GAAP 17.37 (currently 17.74)

Average payout 49.64% (currently 30.58%)

First closed at or over 100 on June 4, 1968

First closed at or over 200 on November 2, 1985

First closed at or over 500 on March 24, 1995

First closed at or over 1,000 on February 2, 1998

First closed at or over 1,500 on March 22, 2000

Highest close = 1527.46 on March 24, 2000

Best year = 1958, 38.06%

Worst year = 1974, -29.72%

Best quarter = Q1 1975, +21.59%

Worst quarter = Q3 1974, -26.12%

Best month = October 1974, 16.30%

Worst month = October 1987, -21.76%

Estimated shares traded for the underlying issues is 4,287,212,318,580

Estimated value: $1.2 trillion is directly invested in the index.

10.83% total return, of which 32.87% is from reinvested dividends

Best stock Altria (formerly Phillip Morris), $1 invested now worth $8,400+

86 issues are still in the index since 1957

On the aside, why would S&P release "30 Interesting Data Points" on the S&P500's 50th anniversary? 50 Would have been ideal, while 25 more workable. The only significant numerical correlation I can think of for the number 30 is thats how many stocks there are in the Dow Industrials . . .

Source:
S&P Celebrates 50th Anniversary of the S&P 500
PRNewswire-FirstCall
February 28, 2007
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/
www/story/02-28-2007/0004536425&EDATE=

Its not China, its the Economy (Stupid!)

Tuesday, February 27, 2007 | 03:30 PM

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/27/2007 11:15 am;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

>>>

The consensus seems to be that "pressures by a big drop in the Chinese stock market" is behind today's market plunge. The Shanghai's Composite Index plummeted 9%, widely described as the "biggest decline in a decade."

Getting the blame? "Efforts by investors to cash in on big gains and avoid any government attempts to cool the markets." As a reminder, the Fed did not attempt to do the same in 1999 / 2000.

Now, why the drop in China's benchmark stock index on fears of increased margin requirements should impact the US or Europe is food for thought.

Quite frankly, I don't believe its that.

What's more likely is the growing recognition that inflation remains "worrisome," that growth is slowing, and that the sub-prime mortgage housing debacle will no longer remained "contained."

The market is fortunate that sentiment levels are only frothy, and not completely exuberant. Also potentially containing this pullback: The support levels for the Nasdaq 100 remain steady.

Two recent research pieces discuss these elements in detail: Our Sentiment Review, and the most recent update of the Nasdaq 100 Composite.

Both research pieces can be found at the site here.

Source: WSJ

UPDATE: February 27, 2007 12:30pm

Consider the following headlines, dominated by today's news:

• Freddie Mac to Tighten Subprime Rules -- (2.27)

See also: Video: Freddie Mac chairman and CEO Richard Syron discusses new subprime mortgage standards, which will be implemented September 2007.

• Orders for Durable Goods Tumble (2.27)
A key barometer of business-equipment spending -- orders for nondefense capital goods excluding aircraft -- fell by 6.0%, after increasing 3.6% in December.

• No Worries: Banks Keeping Less Money in Reserve (2.27)
Every Dollar Set Aside Can Cut Into Profits

• Subprime Game's Reckoning Day (2.27)
Risky Lending Fallout Threatens to Spread;
Uncertain ARM Strength

• Home Lenders Cut the Flow of Risky Loans (2.26)
Default Fears Drain Subprime Pool, Adding To Pressures on Prices

• Mortgage Hot Potatoes (2.15)
Banks Try to Return High-Risk Loans To the Originators

• Default Jitters Batter Shares of Home Lenders (2.9)
Risky Mortgages Spark Concerns, Uncertainty About Fallout on Bonds

If you want to believe that some bureaucrat in China changing the margin requirements for local speculators as the cause of the US selloff, then go ahead.

Me? I prefer to believe what is right before my eyes: Decaying economic fundamentals, a complacent market that is overbought and way overdue for a correction. Add to that the single biggest positive contributor to the economy over the past 4 years – Housing – showing no signs of being anywhere near a bottom. A few more jiggles on the screen, and we there will be significant technical deterioration.

China? Yeah, I guess its China . . .

Goldman Sells GSCI to S&P

Tuesday, February 13, 2007 | 06:07 AM

in Commodities | Corporate Management | Index/ETFs

We've mentioned the role Goldman Sachs has played in energy prices last year. They have been accused of manipulating GSCI for trading gains, political advantage, etc. When Oil first dropped, I doubted there was any political manipulation until I could see a market mechanism. It turns out the GSCI was that mechanism.

Now, GS has decided to get rid of the index. From an S&P Press Release:

Standard & Poor’s will acquire the market leading Goldman Sachs Commodity Index (“GSCI”) and two equity index families from the Goldman Sachs, the two companies announced today. Terms of the transaction were not disclosed.

The GSCI, created in 1991, currently includes 24 commodities and is designed to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets.

The clear commodity index leader, the GSCI has an estimated $60 billion in institutional investor funds tracking it, the majority of that coming through over-the-counter derivatives transactions.

After a brief transition period, the index will be renamed the S&P GSCI Commodity Index. (emphasis added)

Hmmm, I wonder when the honchos over at GS decided "we no longer have a need for that index?"

I guess Goldman Sachs naked attempts at manipulating commodity prices, indirectly the equity markets, and possibly even the mid-term elections is now past its "Sell-By" date. I cannot say there was much of a public relations backlash -- a smallish NYTimes article, and the slings and arrows from a few outraged bloggers. But that was pretty much it.

The suspect timing of the unscheduled GSCI rebalancing last July left one to consider to possibilities: that GS is either a collective of naive dolts, or they were blatantly attempting to manipulate the outcome of the mid-term elections. The public clearly thought there was price manipulation going on; they weren't fooled. And the appointment of their Chairman Hank Paulson to Treasury Secretary just before these changes must have been just one of those serendipitous coincidences.

The changes in the GSCI led to a subsequent sell off in the gasoline futures market. After a 5 year run in energy prices, there was a 30% drop in the price of oil after their rebalancing -- and during the 2 months prior to the election. Another lucky coincidence!

Another fortuitous coincidence: GS had a blockbuster quarter following the ramp of the markets.

~~~

There were enough conflicts of interest in place that the markets -- and maybe even GS itsef -- are better off with the index in the hands of a more neutral 3rd party . . .

Update February 13, 2007 4:32pm

A friend notes that following article form 2005:

The Seats of Power
Goldman Sachs rules the Street with smarts and tough tactics. But has it gone too far with the Big Board deal?

Hat tip: Naked Shorts

Source:
Standard & Poor’s To Acquire Goldman Sachs’ GSCI
Press release Feb. 6 2007
http://www2.standardandpoors.com/spf/pdf/index/020607_GSCI.pdf

Various Looks at Sector Performance

Tuesday, February 06, 2007 | 11:30 AM

in Economy | Index/ETFs | Investing | Markets | Technical Analysis

I was chatting with Michael Panzner about the relative performance of numerous sectors since the market top in 2000. In addition to being a Technician, Mike is the author of the forthcoming Financial Armageddon.

We rejiggered a few starting dates, to see how when you bought specific sectors impacted your performance returns.

Consider these 3 different time frames:
>
2000 Market Peak to Present
click for larger chart

If you bought Telecom or IT in 2000, you are still buried, as those Sectors lost half their value. Over the same period, Energy, Materials, and Consumer Staples all did very well.

>
March 1, 2003 (pre-war) to Present
click for larger chart

If you made your entries just before the War began in 2003, IT and especially Telecom did appreciably better.

However, they were outperformed by Energy and Materials. Additionally, Utilities, Industrials and Financials all did quite well, outperforming IT and Tel over the same period.

July 2006 (near market lows) to Present
click for larger chart

Buyers since the July lows of 2006 of IT and Telecom have finally outperformed Energy and Materials, as well as Utilities, Industrials Financials and Health Care.

UPDATE: February 6, 2007 2:32 pm

Jack Ablin, chief investment officer at Harris Private Bank, says don't get too excited about the recent pop in Tech (see above). It’s not about fundamentals — it’s about oil prices.

“Tech owes much of its advance to the 30% decline in crude prices. Over the last three years, technology has acted like a puppet on a string, responding to advances and declines in oil prices,” he writes in recent commentary.” The correlation between the oil prices and the relative performance of technology shares has been a remarkable negative 70%.”

Beginning July 21 when oil was near $75 a barrel, through Jan. 12, a few days before oil bottomed out around $50 a barrel, the S&P 500 Information Technology Index rose 28% – the exact mirror of crude prices. Mr. Ablin says as long as this relationship holds, “technology bulls must be, by definition, crude oil bears.”

I agree.
As we have noted numerous times before, thank your friends at Goldman Sachs for the rally . . .

Source:
Greasing the Tech Stocks
David Gaffen
WSJ, February 6, 2007, 11:44 am
http://blogs.wsj.com/marketbeat/2007/02/06/greasing-the-tech-stocks/

The best investment advice you'll never get

Sunday, December 17, 2006 | 07:41 AM

in Data Analysis | Index/ETFs | Investing | Markets

I stumbled across a fascinating history of indexing in San Francisco magazine.

It begins with an amazing discussion of how Google -- pre IPO -- prepared the soon to be wealthy troops with a crash course in investment theory (from Bill Sharpe, Burton Malkiel, and John Bogle) before the Wall Street sales crew came tromping thru Mountain View.

One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business. Sharpe drew a large and enthusiastic audience, which he could have wowed with a PowerPoint presentation on his “gradient method for asset allocation optimization” or his “returns-based style analysis for evaluating the performance of investment funds.” But he spared the young geniuses all that complexity and offered a simple formula instead. “Don’t try to beat the market,” he said. Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

The following week it was Burton Malkiel, formerly dean of the Yale School of Management and now a professor of economics at Princeton and author of the classic A Random Walk Down Wall Street. The book, which you’d be unlikely to find on any broker’s bookshelf, suggests that a “blindfolded monkey” will, in the long run, have as much luck picking a winning investment portfolio as a professional money manager. Malkiel’s advice to the Google folks was in lockstep with Sharpe’s. Don’t try to beat the market, he said, and don’t believe anyone who tells you they can—not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund. Seasoned investment professionals have been hearing this anti-industry advice, and the praises of indexing, for years. But to a class of 20-something quants who’d grown up listening to stories of tech stocks going through the roof and were eager to test their own ability to outpace the averages, the discouraging message came as a surprise. Still, they listened and pondered as they waited for the following week’s lesson from John Bogle.

“Saint Jack” is the living scourge of Wall Street. Though a self-described archcapitalist and lifelong Republican, on the subject of brokers and financial advisers he sounds more like a seasoned Marxist. “The modern American financial system,” Bogle says in his book The Battle for the Soul of Capitalism, “is undermining our highest social ideals, damaging investors’ trust in the markets, and robbing them of trillions.” But most of his animus in Mountain View was reserved for mutual funds, his own field of business, which he described as an industry organized around “salesmanship rather than stewardship,” which “places the interests of managers ahead of the interests of shareholders,” and is “the consummate example of capitalism gone awry.”

As you can imagine, after that brief education, things did not go as planned when Wall Street's sharpest were paraded through. (heh heh)

The rest of the article is all about the quantitative underpinnings of indexing, and how the entire process came about.

As I've written here before, for many people, indexing is the way to go.

Indexing's largest "flaw" (if you could call it that) comes about during bubble purchases and the ensuing long periods of flat performance. Think about the 1895-1905, the post-1929 crash era, or 1966-82 period. It seems that about every 3 decades or so, markets go thru these underperforming periods. Eventually, they mean revert, but during these decadelong lulls, Indexing requires extreme amounts of patience.

Regardless, is a fascinating article well worth checking out . . .

Sources:
The best investment advice you'll never get
Mark Dowie
San Francisco magazine, December 2006
http://www.sanfran.com/home/view_story/1507/
(One Page Print Version)

Portfolio Theory and Capital Markets (Capital Asset Pricing Model)
William Sharpe

Investments (6th Edition)
William Sharpe

Investors and Markets: Portfolio Choices, Asset Prices, and Investment Advice
William Sharpe
Princeton Lectures in Finance

A Random Walk Down Wall Street
The Time-Tested Strategy for Successful Investing, (Ninth Edition)
Burton G. Malkiel

Investing: The First 50 Years (Hardcover)
John C. Bogle

Common Sense on Mutual Funds
New Imperatives for the Intelligent Investor (Paperback)
John C. Bogle

Coming Soon: India ETF

Saturday, December 09, 2006 | 04:27 PM

in Index/ETFs | Investing

"So far, ETF investors have been mostly shut out of India, but that could be about to change."

So says the WSJ's Ian Salisbury. In an article this week, he discussed a new global index fund development. Apparently, several firms are working on ETFs that will track either the largest Indian companies (Barclays), or a hybrid of US/Indian firms (Amvescap). These could be available to investors before year's end.

Here's a quick excerpt:

Barclays iPath MSCI India Index ETN will follow the MSCI India Total Return Index, according to the filing. Among the index's 68 components, top holdings include Infosys Technologies Ltd., Reliance Industries Ltd., and Icici Bank Ltd., according to the ETN's prospectus.

The MSCI index is broader than the Bombay Exchange Sensitive Index, or Sensex, the 30-component index that is often quoted as the benchmark for the Indian stock market much the way the Dow Jones Industrial Average is in the U.S. In addition, the MSCI index adjusts the weightings of its components to comply with foreign investment rules.

The new Barclays investment product won't be an exchange traded fund, but an "exchange traded note," a debt security issued by Barclays, which promises investors the returns of the index. Investors who hold ETNs take on the risk that Barclays could fail to pay them. However, they don't bear risks associated with "tracking error," the difference between the return of an index mutual fund and its underlying benchmark . . .

Mutual-fund ratings firm Morningstar Inc. says it tracks only two open-end India mutual funds, the Eaton Vance Greater India Fund, which launched in 1994, and the Matthews India Fund, which appeared last year. By contrast, Morningstar follows more than a dozen China-oriented funds. China's economy "is bigger and there is generally more interest," says fund analyst Arijit Dutta. "But, arguably, India is a deeper and more liquid market," he adds.

Mr. Dutta notes that broader emerging-markets funds, which Morningstar generally recommends to investors over single-country funds, put, on average, about 5% of their assets in India -- an amount that is more or less equal to the allocation they give China and Hong Kong combined. Closed-end funds that invest in India include Blackstone Asia Advisors LLC's India Fund and the Morgan Stanley India Investment Fund.

Interesting idea, and makes lots of sense.

Too bad its only their large cap -- I'd like to see midcap or allc ap versions also . . .

Source:
ETF Investors See Passage to India
Ian Salisbury
WSJ, December 6, 2006; Page C11
http://online.wsj.com/article/SB116536969902741807.html