Sunday, December 24, 2006

Duplicate Shares

Roger Nussbaum has a post up on ETF Duplication, questioning who powershares seems to have duplicated funds. A number of "basic 10" sector funds are available in both RAFI and Intellidex formats.

My take is that powershares is letting people choose their alpha. You can get it from the Intellidex black box, or from the fundamental weighting hypothesis.

Some investors are going to want a strictly passive scheme to prevent "black box strategy" risk. This is an implicit problem with backtested strategies. There is a possibility that the underlying market structure that made the strategy work in the past, no longer works in the future.

Another notable feature is that the duplicate funds expose the low quality of the NASDAQ market system for thinly traded securities. On the AMEX, the intellidex ETF's have a dedicated specialist to provide liquidity, resulting in quiet orderly market. On the NASDAQ, no one can hear you scream as you try to buy/sell RAFI sector ETFs.

However, I am now sour on Powershares because of the bigger issues of realized fund expenses (in many funds expenses have been higher than 0.60%) and many new powershares have 0.70% expense ratio's (subject to a confusing 0.60 cap). At that level, Powershares are getting close to the expense ratios of active funds.

First trust also gets a lump of coal for sponsoring high expense funds. For example, the First Trust Value Line Dividend Index Fund (FVD) is based on an index of stocks Value Line gives a Safety Ranking of #1 or #2. Th stock are then screened for size (>$1 Billion) and dividend yield (to greater than the median yield of the S&P 500). This is a very appealing ETF tracking an index of low volatility stocks with strong balance sheets and high yields. This is something that people would want to own, and should own. But the FVD's 0.70% expense ratio sops up the excess yield, so that fund yields only 2.1%, same as (SPY). Thus a lack of desire.

Hopefully SSgA/Barclays/Rydex will take advantage of the situation to introduce new ETFs with lower expense ratios. For example Vanguards Emerging Markets ETF (VWO) (0.30% expense ratio) is slowly sucking up assets from iShares MSCI Emerging Markets (EEM) (0.75% expense ratio).

Sunday, December 17, 2006

Thoughts on fearless predictions. It's too soon to tell.

On September 26th 2006, I posted a set of predictions about the housing market, US Macroeconomy, and Investment themes. Lets run through them how see how they panned out so far.

US Housing Market

It's clear that the general direction of US housing is down, and it is taking the US economy with it. The main questions at this point relate to "how much" and not "if".

First prediction: "Mild national housing recession with regional hard landings in overbuilt areas." This greatly depends on your definition of mild, I put this in the "too soon to tell" category. So far it seems the bubble is unwinding slowly.

Second prediction: The issue of the Reserve army of unsold housing depressing prices hasn't been fully experienced or understood.

Most people who buy houses are already homeowners. If they can't sell the old house then they can't move into a new house. Back end sales drive front end sales. Any slowdown in housing inventory turnover has gruesome effects on total home sales. David Lereah and NAR are in complete denial of this unimpeachable fact.

Third prediction: "waves of opportunistic refinancing as people switch out of ARMs and lock in fixed rates" We are indeed seeing this. IMHO this will end within a year or two as everyone who wants to refinance will have done so.

Fourth prediction: "Widening of spreads between credit and non-credit ARM portfolios" has happened. A combination of reckless underwriting and mortgage fraud will probably cause the 2005/2006 vintage to be the worst since the beginning of modern residential mortgage lending.

This meltdown has caused deserved major damage in the sub-prime Mortgage sector. They face a triple witching of hopelessly fraudulent loans, natural deterioration of overleveraged borrowers, and a decline the value of foreclosed real estate owned. To paraphrase Seth Klarman; ""It is completely obvious that this will end badly - for the firms, borrowers, investors, everyone."

Spill over effects from the slowdown in housing and inverted yield curve have also done serious damage to the Active originator/Prime Investor AOPI REIT sector. Nice, ethical companies like Homebanc (HMB) and New York Mortgage Trust (NTR) have imploded. This is sad because these companies have unrecognized franchise value from origination platforms and large books of prime residential mortgages.

Eventually this will be a very profitable sector for distressed value investors to pick through. SSgA's KBW Mortgage Finance ETF, which has been in process for a long time, will be a very timely investment once the deflation of the housing bubble settles down.

Friday, December 08, 2006

Ocean Tomo 300 Patent Index

One interesting development in the past month is the promulgation of the Ocean Tomo 300 Patent Index and an ETF (tentatively (OTP) ) from Claymore that will track this index.

Ocean Tomo's index aims to quantify the value of intellectual property owned by companies and then create an index of companies with large intellectual property assets. The index is then further stratified by investment style and company size to create a representative index of universe of companies that rely on intellectual property to create value.

This could be a very interesting tool for people like myself who tend to be hard asset investors. Hard asset investors focus on tangible assets, we tend to be driven by balance sheet value. But it is clear that many companies have "capital intangibles" that are valuable, and at times undervalued.

Sunday, December 03, 2006

Aegean Marine Petroleum (ANW) Risk Factors

Proceedings concerning our founder and largest shareholder, Dimitris Melisanidis, could generate negative publicity for us, harm our reputation and adversely affect our business and our stock price.

Our founder and largest shareholder, Dimitris Melisanidis, has played a key role in the development and success of our business. Mr. Melisanidis is a prominent figure in Greece and has been the subject of a variety of proceedings, including two felony and four misdemeanor cases brought in 1999 and 2000 alleging illegal fuel trading, and a felony case brought by the counterparty to a commercial dispute alleging embezzlement, all resulting in acquittal.

Mr. Melisanidis was also subject to a 1988 misdemeanor case alleging complicity in bribery of a civil servant in connection with obtaining a drivers license for a student at a time when Mr. Melisanidis operated a driving school and a 1980 misdemeanor case alleging bribery of two players in an amateur soccer game. These matters resulted in convictions and fines of approximately $928 and $2,330 (in U.S. dollars at the time).

The foregoing criminal matters and other proceedings are discussed in this prospectus under the heading "Business—Proceedings Involving Our Founder, Mr. Melisanidis."

From the from the most recent form F-1 dated November 24 2006, for Aegean Marine Petroleum Network Inc (ANW). Not that we expect angels, but the section "Proceedings Involving Dimitris Melisanidis" would make a good HBO miniseries.