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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
  • Bond Funds: How To Use Diversification To Minimize Risks
    It may be even easier to explain (or, my mind may just work in strange ways).
    Say you purchase a bond with the intent of holding it to maturity. (This is the only assumption I will make about you - it doesn't matter whether you are a long term holder. The hold to maturity assumption is necessary, else one cannot say that the original bond is "immune" to interest rate risk.)
    Interest rates rise. Your intent has not changed; you intend to hold a bond that matures on a specific date. You can sell your bond at a loss, and purchase another one to replace the bond you owned. No change of grade or maturity date.
    You'll get a higher yield on the replacement bond, that will exactly make up for the loss. How could it be otherwise? You could have purchased your own bond back at market price you just sold it for.
    Tax treatment is another matter. When you sell the bond at a loss, you'll have a capital loss. But the higher interest that you earn on the replacement bond will be taxed as ordinary income. If you purchased your own bond back (at a discount), the "appreciation" back to par from the discounted price would be considered ordinary income by the IRS. Whether you buy back your own bond or a different replacement bond, from a tax perspective swapping bonds looks like a losing tactic.
    (Note that even if you're talking about muni bonds, the "phantom interest" due to the "appreciation" of the bond due to market discount is considered taxable income.)
    Edit: if you purchase your own bond back, you have a wash sale, the maturity price will be the same as the purchase price (assuming your original purchase was at par), and you'll just have received the same interest payments you would have gotten had you not sold and repurchased your bond. In short, swapping a bond for itself winds up having no net tax effect. But swapping a bond for an equivalent one does, for the worse.
  • Emerging Markets Weekly Review: Are Funds Out Of Favor?
    India @ Eight Month Low/China Valuation Fueled Higher
    The 30-share gauge, Sensex...closed at an 8-month low of 26,425.30 -- a level not seen since October 17, 2014 .Similarly, the 50-share Nifty has stumbled by 476.05 points or 5.63 per cent in the past three weeks
    Concerns that the US Fed will increase rates as early as September on better-than -expected jobs data, drought fears and RBI's cautious stance on economic recovery continued to hit the sentiments.
    Foreign investors turned cautious in anticipation of a inclusion of Chinese A shares in the MSCI Emerging Markets Index, which could see them move to Chinese markets, traders said Such an inclusion would have resulted in a sharp increase in China's weightage in the index, coming at an expense of other emerging markets including India.
    http://profit.ndtv.com/news/market/article-sensex-ends-week-with-loss-of-343-points-771318
    Against grain ,I took profits here MCSMX and added here MINDX
    China’s Stock Market Value Tops $10 Trillion for First Time
    by Richard Frost Updated on June 14, 2015 — 5:15 AM CDT Bloomberg
    Companies with a primary listing in China are valued at $10.05 trillion, an increase of $6.7 trillion in 12 months, according to data compiled by Bloomberg. The gain alone is more than the $5 trillion size of Japan’s entire stock market. The U.S. is the biggest globally, at almost $25 trillion.
    No other stock market has grown as much in dollar terms over a 12-month period, as Chinese individuals piled into the nation’s equities using borrowed funds to bet gains will continue. Valuations are now the highest in five years
    http://www.bloomberg.com/news/articles/2015-06-14/china-s-stock-market-value-exceeds-10-trillion-for-first-time
    China's stock market value tops $10T
    Jun 14 2015, 10:20 ET | By: Yoel Minkoff, SA News Editor
    http://seekingalpha.com/news/2578975-chinas-stock-market-value-tops-10t?uprof=46
  • Bond Funds: How To Use Diversification To Minimize Risks
    I am confused by this statement in the linked report:
    "There is a common misperception that holding a bond to maturity makes your portfolio immune to interest rate risk. The reality is, when rates rise, the total expected return from a bond is identical, regardless of whether the bond is held to maturity or sold at a loss and replaced with a bond that pays a higher coupon."
    Seems to me that holding a bond to maturity does make your portfolio immune to interest rate risk. You will get the bond coupon and your principal back regardless of interest rate changes assuming the issuer does not default.
    The author is referring to the total return of the bond.
    And implicit in the discussion is that the investor is going to be a long term owner of bonds. What the author said does not hold true if someone buys bonds today, interest rates rise tomorrow, and they sell their bonds at a loss of principal and the proceeds go into some other investment.
    "The reality is, when rates rise, the total expected return from a bond is identical, regardless of whether the bond is held to maturity or sold at a loss and replaced with a bond that pays a higher coupon"
    Scenario A: The bond is held to maturity, so there is no loss of principal. However, there is a "loss"......the person is getting less semi-annual interest than he would get from selling his bonds at a loss and buying the current bonds. He gets more semi-annual interest from the higher coupon current bonds. The trade-off: he took a loss of principal on the bonds he owned.
    Scenario B: He sells his bonds at a capital loss, and immediately purchases the current higher coupon bonds. His loss of capital will eventually be made up for by the extra interest he is earning, since he now owns bonds with higher coupons.
    Again, this only works for the long term owner of bonds, not the person who sells at a loss and puts the proceeds elsewhere.
    The concept that the author presents works the same for individual bonds and bond funds......again, for the long term owner of bonds.....not for the person timing the bond market........not for the person who is changing his asset allocation % of bonds vs. stocks after rates change.
  • Pink Slips at Disney. But First, Training Foreign Replacements. - Another hurdle for US Workers
    Unfortunately this is the dark side of capitalism. Management team gets rewarded when they cut cost (as in domestic human capital) that ultimately leads to higher stock price and large bonus, regardless of the quality of the products or services they provide to their customers.
    Case in point - support service of the large box PC manufacturers are absolutely appalling in the last decade since they are outsourced to foreign countries who have considerable language barrier challenges and thorough understanding on the local cultures. When were the last time you have a great experience with Dell and HP computers?
  • Bond Funds: How To Use Diversification To Minimize Risks
    I am confused by this statement in the linked report:
    "There is a common misperception that holding a bond to maturity makes your portfolio immune to interest rate risk. The reality is, when rates rise, the total expected return from a bond is identical, regardless of whether the bond is held to maturity or sold at a loss and replaced with a bond that pays a higher coupon."
    Seems to me that holding a bond to maturity does make your portfolio immune to interest rate risk. You will get the bond coupon and your principal back regardless of interest rate changes assuming the issuer does not default.
    I believe the author eluded to tax harvesting the potential losses from selling a bond prior to maturity and pooling these losses against any gains. Then using remaining proceeds from the sale of the bond would be used to buy a higher yielding bond.
    Obviously this has to happen in taxable accounts.
    Including an example and showing the math would have made this much clearer to the reader.
  • TLT Downtrend Emerges
    The Return Of The Bond Vigilantes By James Picerno | Jun 11, 2015 at 06:44 am EDT
    The Capital Spectator
    US Treasury yields continued to rise yesterday, with the rate on the benchmark 10-year Note reaching 2.50%–the highest level since last September, based on data from Treasury.gov. Meanwhile, the 2-year yield—considered the most sensitive spot on the yield curve for rate expectations—ticked up to a four-year high of 0.75% on Wednesday (June 10).
    Meantime, recent data for the labor market paints an encouraging profile. After last week’s surprisingly strong rise in payrolls for May, along with jobless claims sticking close to a 15-year low, the Labor Department this week advised that job openings in April jumped to a 15-year high.
    The net result is that the Treasury market is focused on the rising possibility that the Federal Reserve will start raising interest rates in the near future, perhaps as early as September.
    http://www.capitalspectator.com/the-return-of-the-bond-vigilantes/
  • Stocks that could pass as Mutual Funds
    Capital Southwest Corporation, CSWC, is a publicly traded investment company located in Texas that invests in other companies, both private and public. Not too long ago, this was a large holding in the Pinnacle Value Fund. CSWC is preparing to spin off some of its assets into another company which will be spun-off to shareholders.
  • FPA Perennial Fund, Inc. (changing its name and closing to new investors for a couple of months)
    No, sir. Geist and Ende were the outliers at FPA for years. While the rest of FPA were hard-core absolute value guys, G&E ran splendid small to mid cap growth funds, fully invested in very high-quality companies, negligible turnover, drifted between small and mid, growth and blend. Returns were consistent and solid.
    The funds were F P A Paramount (FPRAX), F P A Perennial (FPPFX) and the closed-end Source Capital (SOR), and they were pretty much clones. F P A decided, about a year ago, for whatever reason, to take FPRAX from the guys and convert it to a global all-cap absolute value fund. Now FPPFX is becoming the U S version of Paramount, it seems.
    But ... Geist did retire in 2014 and Ende, at age 70, is moving toward the door. Greg Herr, more of a Romick-type guy, was added to the team several years ago, presumably in anticipation of the transition.
    Two reasons to sell:
    1. the new fund will likely have nothing in common with the old. If you had a reason for buying Perennial before, it's gone now.
    2. the tax hit will be substantial. Morningstar calculates your potential capital gains exposure at 63%, that is, 63% of the fund's NAV is a result of so far untaxed capital gains. If the portfolio is liquidated, you could see up to $36/share in taxable distributions. During the Paramount transition, the fund paid out about 40% of its NAV in taxable gains including two large distributions in two weeks.
    Certainly the tax hit will vary based on your cost basis, but my as-yet uninformed guess is that if your cost basis is high - $35/share or more - you might be better getting out before the big tax hit comes.
    But, really, I'm not a tax guy. That's just a superficial take on it.
    David
  • David's June Commentary
    Looking at M* portfolio holdings for JOHIX, it looks like very good stock picking to me. Tech and healthcare are represented well. Several stocks have 40% plus gains YTD. Very few have single digit gains. Being that this is a international fund, the manager/s chose wisely
  • FPA Perennial Fund, Inc. (changing its name and closing to new investors for a couple of months)
    This is not a trivial change, but it appears (to me) to be a pretty fundamental re-do:
    http://www.fpafunds.com/docs/fund-announcements/2015-06-04-perennial-press-release-final.pdf?sfvrsn=2lease-final.pdf?sfvrsn=2
    1. New manager change, plus an alteration from 2 managers to one manager. Eric Ende, as he transitions toward retirement, will move entirely away from this fund and yet remain with Source Capital for awhile, the CEF-equivalent of Perennial which presumably will retain its SC/MC quality mandate. Gregory Herr will pass the baton to Mr. Nathan and focus exclusively on his Paramount charge, which he currently co-manages.
    2. Perennial will become US Value and morph, after temporary closure, to an all-cap posture. That this new mandate will result in significant portfolio change is apparent from their press release:
    "FPA Perennial Fund will close to new investors on June 15, 2015, as the portfolio manager change will result in significant long-term capital gains. FPA expects to reopen the Fund to new investors in October, following the portfolio transition."
    So, congratulations, Perennial holders, the role this MF plays in your portfolio has just been changed for you.
  • FPA Perennial Fund, Inc. (changing its name and closing to new investors for a couple of months)
    http://www.sec.gov/Archives/edgar/data/732041/000110465915043479/a15-13532_1497.htm
    497 1 a15-13532_1497.htm 497
    FPA Perennial Fund, Inc. (FPPFX)
    Supplement dated June 4, 2015 to the
    Prospectus dated April 30, 2015
    This Supplement updates certain information contained in the Prospectus for FPA Perennial Fund, Inc. (the “Fund”) dated April 30, 2015. You should retain this Supplement and the Prospectus for future reference. Additional copies of the Prospectus may be obtained free of charge by visiting our web site at www.fpafunds.com or calling us at (800) 638-3060.
    CHANGE IN NAME
    Effective September 1, 2015, the Fund’s name will be changed to “FPA U.S. Value Fund, Inc.”.
    CHANGE IN PORTFOLIO MANAGERS
    Effective September 1, 2015, the paragraphs under the heading “Summary Section — Portfolio Managers” on page 7 of the Prospectus are deleted and replaced in their entirety with the following:
    “Portfolio Manager. Gregory Nathan, Managing Director of the Adviser, has served as a portfolio manager since September 1, 2015.”
    Effective September 1, 2015, the paragraphs under the heading “Management and Organization — Portfolio Managers” on page 13 of the Prospectus are deleted and replaced in their entirety with the following:
    “Portfolio Manager
    Gregory Nathan is primarily responsible for the day-to-day management of the Fund’s portfolio.
    Mr. Gregory Nathan has been an analyst for FPA’s Contrarian Value strategy, including FPA Crescent Fund, since January 2007. Prior to joining FPA in 2007, Mr. Nathan was a managing member of Coldwater Asset Management LLC.
    The SAI provides additional information about the Portfolio Manager’s compensation, other accounts managed by the Portfolio Manager and the Portfolio Manager’s ownership of shares of the Fund.”
    Effective September 1, 2015, Eric Ende and Gregory Herr will no longer be Portfolio Managers of the Fund.
    DISCONTINUANCE OF SALES TO NEW INVESTORS
    Effective on or about June 15, 2015, the Fund has discontinued indefinitely the sale of its shares to new investors, except existing shareholders, directors, officers and employees of the Fund, the Adviser and affiliated companies, and their immediate relatives.
    In addition, the Fund will allow new investors to purchase shares if they fall into one of the following categories:
    1. Clients of an institutional consultant, a financial advisor, a financial planner, or an affiliate of a financial advisor or financial planner, who has client assets invested with the Fund at the time of your application;
    2. Investors purchasing Fund shares through a sponsored fee-based program and shares of the Fund are made available to that program pursuant to an agreement with FPA Funds or UMB Distribution Services, LLC, and FPA Funds or UMB Distribution Services, LLC has notified the sponsor of that program, in writing, that shares may be offered through such program and has not withdrawn that notification;
    3. Investors transferring or “rolling over” into a Fund IRA account from an employee benefit plan through which you held shares of the Fund (if your plan doesn’t qualify for rollovers you may still open a new account with all or part of the proceeds of a distribution from the plan);
    4. You are an employee benefit plan or other type of corporate or charitable account sponsored by or affiliated with an organization that also sponsors or is affiliated with (or is related to an organization that sponsors or is affiliated with) another employee benefit plan or corporate or charitable account that is a shareholder of the Fund, and;
    5. You are a participant of an employee benefit plan that is already a Fund shareholder.
    The Fund may ask you to verify that you meet one of the categories above prior to permitting you to open a new account in the Fund. The Fund may permit you to open a new account if the Fund reasonably believes that you are eligible. The Fund also may decline to permit you to open a new account if the Fund believes that doing so would be in the best interests of the Fund and its shareholders, even if you would be eligible to open a new account under these guidelines.
    The Fund’s ability to impose the guidelines above with respect to accounts held by financial intermediaries may vary depending on the systems capabilities of those intermediaries, applicable contractual and legal restrictions and cooperation of those intermediaries.
    The Fund continues to reinvest dividends and capital gain distributions with respect to the accounts of existing shareholders who elect such options.
    FPA Perennial Fund, Inc. (as of September 1, 2015, FPA U.S. Value Fund, Inc.) expects to re-open to new investors during October 2015.
  • DAILYALTS: Blaine Rollins: The Week Of Sand And Dollars:
    Sven & John Chisum: Let's get our facts straight !
    Mr. Mueller used one of Denver's most elite organizations to find potential investors. He wooed members of the tony Cherry Hills Country Club, an opulent golf club in a Denver suburb that is dotted with mansions, according to investors. He also wooed neighbors from Cherry Hills Village where he lived and relied on the names of his most prominent clients to promote his own fund, investors said.
    One such prominent investor was former Janus Capital money manager Blaine Rollins who once oversaw $11 billion in the Janus Fund. Mr. Rollins not only invested in Mr. Mueller's fund, but he also worked for the business, becoming the director of research last year, according to his attorney, Dan Shea of Hogan & Hartson LLP.
    Mr. Shea said that Mr. Rollins had no knowledge of the alleged fraud, adding that his client also lost money. "Blaine invested a substantial amount of money and never made a withdrawal," Mr. Shea said. "He still to this day does not know what Mueller did."
    Regards,
    Ted
    Source:
    Al Lewis, WSJ 4/29/10
  • David's June Commentary
    Hmmm ... I blew a job interview once with a particularly weak answer to the request to "describe a hard decision you've made and how you went about making it." I'd spent much of my professional life making really consequential decisions about people's careers, the direction of my college and so on. After a while, it struck me that I was tripped up by the word "hard." In my mind, "hard" decisions are consequential decisions you're forced to make without having enough understanding to make them well. Because I tend to obsess about advance planning, very few of my decisions felt hard though many of them were profoundly painful.
    That's where I am now on the market. I'm not particularly concerned with corrections or bears because, though I can't predict them, I understand them and can plan around them: Adjust your savings and withdrawal rates, shift asset allocations at least at the margin, ignore your portfolio whenever you feel the urge to do something brilliant, and be very comfortable with your managers. Meh, no biggie.
    The thing that has me worried is the argument that I've heard now from several managers that the system itself might be broken. That's manifested in the liquidity arguments that I've been writing about. "Highly liquid" assets are, by definition, easily valued and easily traded; Treasuries are the paradigm case. We buy investments with the assumption that we can also sell them. Those sales happen through the good offices of intermediaries, sometimes called "market makers." Those folks maintain pools of tens, perhaps hundreds, of billions of capital. They buy your shares, using their money, at a fraction of a penny per share below the last price. Sometime later, maybe minutes, maybe hours, they sell it someone else for a fraction of a penny markup.
    So, three parties to the trade: seller, market maker, buyer. We traditionally worry that high valuations will eventually make buyers scarce. That is, no "greater fool" is available and you have to sell your holdings at a discount. Buyer/seller mismatch. "Correction" occurs.
    But what happens if the problem isn't between buyer and seller but between seller and market maker? That is, what if the conveyor belt that normally, quietly, profitably, invisibly moves shares between sellers and buyers isn't working? I'd like to sell $100 million in a bond and you'd like to buy them for $95 million but there's nobody capable of coming up with the initial capital to move them from me to you? At base, my bond would become unsellable, illiquid. That's the liquidity crunch.
    Why might that occur? There have been a bunch of shifts in the financial services industry, some occasioned by good-spirited reforms imposed after the last two crises (two of the three worst market crises in a century occurred within eight years of one another, wonder if that's significant?), which have fundamentally impaired the number and size of intermediaries.
    David Sherman and others have pointed out that that's already happening in some corners of the market: people are finding it almost impossible to sell very large blocks of bonds, people are finding it hard to sell stocks at mid-day and so on. And that's occurring in the good times. What happens if large, highly-leverage investors get spooked and try to unwind, say, a half trillion at the same time and find that they simply can't? Do you get an October '87 repricing (down 23% in an afternoon)? Do you get a fundamental change in the willingness of international capital to underwrite us because we're no longer "safe"? Do you get an October '08 freeze (where even the shortest term, most liquid paper couldn't be traded and volumes dropped 75%)? Do you get employers who can't honor their payroll obligations because they can't tap the paper markets? How might you react if your employer that they were hoping to be able to pay you sometime in the next week or so, at least part of your normal pay, but they weren't able to give a time or amount?
    And is the fact that the smartest of the smart money people - that top 1% of institutional and private investors - are worrying about their own ability to "get out the door" independently significant? When guys who manage money for the really rich tell me that they're "standing outside the theater, shouting 'fire,' but nobody's listening," should I write them off as simply alarmist?
    Here's what I got for answers: dunno, dunno, dunno, dunno, dunno, dunno, dunno and dunno.
    Which I really dislike.
    So, yeah, I think the markets are pricey but that's not really the thing that's nibbling the most at my brain.
    For what that's worth,
    David
  • How I interpreted the suggested strategy in David's June commentary I thought there was a strategy
    @linter, I would not sell healthcare if you have large gains. If you have multiple funds, select those that need pruning from the portfolio. Good time to get rid of any under performers. If we get a good 10-20% correction then you would have buying opportunity.
    I believe healthcare would recover quickly from any down draft.
  • BlackRock Event Driven Equity Fund to reopen to new investors (tentatively)
    "Event-driven" tends to be code for "market neutral, we hope." In general the plan is to try to pick up a bunch of small gains from arbitrage, which you can pocket even when the market's falling. One example: if Company A is expected to buy Company B, in about 90% of the time A's stock will fall upon the announcement and B's will rise. So you short A and go long on B, hold the positions for a few days or weeks and close them out with a market-neutral gain of 3%. If the market falls while you're holding these positions, your bet is that your short position will fall more than your long position will, so you'll make a big gain on the short, a smaller loss on the long, and you'll still pocket 3%.
    The BlackRock fund is tiny and sucky. They just brought in a new manager, Mark McKenna. McKenna's previous employer was Harvard Management Company, the guys who manage the endowment. HMC was having a house-cleaning after years of unacceptable returns. BlackRock hired McKenna to manage an event-driven hedge fund for them then switched him here to try to stanch the bleeding.
    For what that's worth,
    David
  • ETF Market Vital Signs, May 29: As Wind in Dry Grass
    image
    Despite declines for the day and the week, the major averages posted solid gains for the month: Dow +1%, S&P +1.1%, Nasdaq +2.6%.
    Treasury prices rose as a weak reading on regional factory activity added fuel to typical month-end demand; the 10-year yield fell 3 bps at 2.10%, the lowest in three weeks
    http://seekingalpha.com/news/2552306-stocks-stumble-but-still-positive-for-the-month
    Nat Gas big loser for week.
    Weekly ETF Gainers / Losers
    May 29 2015, 16:17 ET | By: Jignesh Mehta, SA News Editor
    Gainers: TLT +1.94%. VXX +1.82%. UUP +0.71%. OIL +0.57%. KBWD +0.39%. Losers: GAZ -14.89%. UNG -9.05%. EWZ -5.73%. KOL -5.39%. FXI -5.03%.
    http://seekingalpha.com/news/2552276-weekly-etf-gainers-losers
    Monitoring The Trend In Treasury Yields With Moving Averages
    By James Picerno | May 29, 2015 at 08:01 am EDT The Capital Spectator
    The recent stumble in US economic data raises new questions about the timing of the Fed’s plans for raising interest rates. The earliest forecast for the first round of tightening monetary policy has been pushed up to September, although some analysts say that the turning point for rates will come later, perhaps early next year. Much depends on the incoming data, of course. Meantime, what is the Treasury market telling us? One way to cut through the noise in search of signals is to calculate a series of moving averages on Treasury yields. By that standard, the market’s sending mixed messages these days. The 2-year yield—considered to be the most sensitive spot on the yield curve for rate expectations—is trending up. The 5- and 10-year yields, by contrast, continue to trend lower, although there are some clues that suggest that the slide has run its course in longer-term maturities.
    Let’s start with the 2-year Treasury. As the chart shows, there’s a clear upside trend in progress
    By contrast, negative momentum continues to prevail in the 5-year market. Although there have been attempts to revive an upside bias, those rallies have come to naught so far
    The benchmark 10-year yield tells a similar story. There have been several rallies, but so far the downtrend hasn’t been broken. But perhaps that’s about to change. Note that the 50-day E M A for the 10-year yield ticked above the 100-day E M A in the last two days for the first time in more than a year.
    With Charts
    http://www.capitalspectator.com/monitoring-the-trend-in-treasury-yields-with-moving-averages/
  • Top Large-Cap Mutual Funds Feed On Growth Stocks
    So my question is which Large Cap companies have not already been priced today for future growth? Instead of only using Price Earnings ratio PE), one recent wealth tracks interviewee (Tom Russo) suggested evaluating company growth based on a company's ability to increase market share.
    I wonder if anyone here own funds where the manager's focus is on companies that dominant market share or are strategically trying to achieve increased market share. Attention to mergers and acquisitions might be one method of increasing market share. A recent merger deal between Broadcom and Avago maybe attempting to increase market share to compete more effectively with companies like Qualcomm and Intel.
    The oil and gas industry as well as the commodities sector seem ripe for M&A (Mergers and Acquisitions). Columbia Funds had a fairly successful fund UMBIX that isn't talked about much these days.
    Anyway, here's an interesting article on the complexity of cross border mergers:
    Avagos-Pending-Broadcom-Purchase-Taps-Arcane-Tax-Structure
    I wonder that as QE continues in Japan, Europe and China, will this cheap capital encourage more of these deals, cross border or not.
  • WealthTrack Preview:
    FYI: ( I will link repeat program, early tomorrow morning, when it becomes available for free.)
    Regards,
    Ted
    Dear WEALTHTRACK Subscriber,
    With stocks and bonds more expensive than they have been in 90% of market history even institutional investors are feeling conflicted about where to invest. According to a recent survey of global Chief Investment Officers, they are reluctantly increasing their allocation to stocks in order to get higher returns, even though they are worried about a major market correction. This week, with the permission of State Street Global Advisors, the sponsor of the survey we are sharing the “Walking The Tightrope” survey report with you. It will be available on our website, over the weekend.
    It is the beginning of a fund raising season on public television, so this week we are revisiting an interview with Paul McCulley, a Financial Thought Leader, noted
    Fed watcher, economist and former short term bond trader.
    The reason we chose to highlight McCulley’s interview again is because he makes a strong case for one side of a very important economic debate, the outcome of which will have a huge impact on the markets. McCulley is a proponent of the “secular stagnation” theory being argued by former Treasury Secretary Lawrence Summers. If they are right, that we are in a period of prolonged economic stagnation, then interest rates should remain near historic lows for several more years and both the stock and bond markets should benefit as a result. If they are wrong, both markets are grossly overvalued and due for a severe correction.
    You might recall that for years McCulley was a Senior Partner at bond giant PIMCO. He was a founding member of its Investment Policy Committee, along with firm founder Bill Gross, and author of the influential monthly “Global Central Bank Focus”. During his time at PIMCO, he managed their huge short term trading desk, overseeing an estimated $400 billion dollars in assets.
    McCulley retired from PIMCO in 2010 to write, think, speak and otherwise lead a more balanced life, which he did until last year when he was asked to return to his old firm, by his former boss and close friend, Bill Gross. Gross then unexpectedly left the firm a few months later, an experience McCulley will talk about in our exclusive EXTRA feature on our website.
    McCulley is known for his understanding of economics, the capital markets and Fed policy. Long before the 2008/2009 financial crisis he identified the powerful and destructive rise of what he called the “Shadow Banking System”, the unregulated institutions fueling the housing and credit bubble. He also coined the phrase “Minsky Moment”, after economist Hyman Minsky’s theory that financial stability, as this country had during the Alan Greenspan era, ultimately leads to financial instability, as people and institutions take on more and more risk.
    That is exactly what happened.
    In this interview he makes some other startling predictions about Fed policy under Janet Yellen, Mario Draghi’s intentions and the global level of interest rates.
    If WEALTHTRACK isn’t showing on your local station due to pledge, you can always watch it on our website, WealthTrack.com over the weekend. As I mentioned you will also find our exclusive online EXTRA interview McCulley about his decision to retire – twice – and how he’s achieved a work/life balance.
    Have a great weekend and make the week ahead a profitable and productive one.
    Best Regards,
    Consuelo
  • Time To Reinvest In The Eurozone?
    This should have been written months ago. The big gains for EAFE came in the first two months of the year. There are likely more to come, but like so many 'expert' commentators, this one is late to the party.
  • Taxes Matter In Fund Investing, Even When There's No Bill
    Actually, the paper seems to say something a bit different.
    All else being equal (i.e. same fund family, similar "size, value, and momentum scores"), the researchers found no meaningful difference in pre-tax performance between tax-managed and non-tax-managed funds.
    The average before-tax return is very similar for tax-managed funds and non-tax managed funds (0.27% vs. 0.26% per month). ... The average before-tax return is not significantly different between exchange-traded funds and matched open-ended index funds (0.50% vs. 0.51% per month).
    Aside from keeping turnover lower (and hence costs lower), other techniques used by tax-managed funds tend to limit what a fund can do and thus potentially impede pre-tax performance. Quoting from the paper's abstract:
    Mutual funds can reduce the tax burdens of their shareholders by avoiding securities that are heavily taxed and by avoiding realizing capital gains that trigger higher tax burdens to the funds’ investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce their before-tax performance.
    The abstract continues: "Surprisingly, more tax-efficient mutual funds do not underperform other funds before taxes, indicating that the constraints imposed by tax-efficient asset management do not have significant performance consequences." Emphasis added. That is, the conclusion is only that tax-managed funds don't do worse, not that they do better.
    What improves pre-tax performance is not tax-efficiency, but keeping trading costs down (a side effect of minimizing trading to keep realized gains down). So look directly for funds with low trading costs
    There are lots of papers that discuss trading costs. Brokerage fees can be found in SAIs, and should correlate well with turnover ratios. Market impact is likely affected by how much of a company a fund owns. ISTM that these are the factors that one should be looking at, not tax-efficiency, which is at best a proxy for these costs.