NEWS/BLOG

Funds for a Bear Market

Although we’ve focused mostly on ETFs here, quite a few mutual funds are designed to do well in bear markets. Most of them are index funds, such as Rydex Inverse S&P 500 2x Strategy RYTPX which returns twice the inverse of the S&P 500 return each day. RYTPX gained 94% over the year ending March 1, and Rydex Inverse Dow 2x Strategy RYCWX showed a similar gain.

Over a dozen of these index funds were up more than 50% for the year and almost all the bear market stock funds are showing double-digit gains over the same period. Such funds are extremely volatile as are the similar bear-oriented ETFs. A one- or two-day bear rally can trigger huge losses, and a sudden market turnaround could be catastrophic. This is why they’re best used as a hedge in a portfolio of other investments.

Another possibility, however, are bear-oriented mutual funds that are actively managed (as most mutual funds are, though most aren’t geared to bear markets). Two possibilities are Federated Prudent Bear BEARX and Grizzly Short GRZZX.

BEARX uses short sales when the price of a stock is expected to decline. It may hold more “short” equity positions than “long” equity positions and can also purchase restricted securities in private placement transactions, exchange-traded funds (ETFs), and hybrid and derivative instruments. Former pwner-manager, David Tice actually warned of the credit crisis years before it occurred. His co-manager, Doug Noland took over after Tice sold his company to Federated, but the fund’s strategy remains the same. Noland’s market commentary can be found at www.prudentbear.com and he has been widely quoted as a critic of Greenspan’s policies.

GRZZX also engaged in short selling, using only actively traded, highly liquid stocks with a market cap of $1.5 billion are selected. Typically it has 45 to 70 such stocks. Manager Steven Leuthold uses a proprietary Vulnerability Index. to find stocks, which are selected from actively traded, highly liquid stocks with a market cap of $1.5 billion. Interviewed in August of 2008, he pegged the beginning of the recession as near the end of 2007. He projected that the economy would show “some positive signs sometime in the first half of 2009.” His commentaries are widely quoted on the Internet.

The 10-year performance of both funds is up over 10%, while GRZZX has a one-year performance of over 78% and BEARX is up over 33%, as of March 26. When comparing the two, consider such factors as the load. For example, if purchased through Fidelity investments, BEARX has a load of 5.5%, while GRZZX is a no-load, but carries a redemption fee if the fund is held less than 180 days.

Do your own due diligence. A good site for researching mutual funds is www.morningstar.com.

Where Men are Men

Boom! Boom! At night one hears the explosion of cars and SUVs bought during the recent bubble. Owners who can no longer afford their vehicles are demolishing them in order to collect the insurance. The owner of a $35,000 Range Rover might owe $100,000 on it. As Michael Lewis (author of Panic, Liar’s Poker: Rising Through the Wreckage on Wall Street and other books) writes in the April issue of Vanity Fair, Icelanders incurred debts totaling 830% of the country’s GDP, making the U.S. appear rational and conservative at just 350% of GDP.

Lewis says you can tell a lot about a country by the way it treats foreigners at the point of entry. In Iceland just one “All citizens” sign welcomes Icelanders and visitors alike. This confirms the idea of Icelanders as nice, friendly people. It’s not that simple, however, as Lewis found out. Icelandic males go crashing into each other or into unsuspecting foreigners for seemingly no reason at all. “Everywhere I walk Icelandic men plow into me without so much as a by-your-leave. Just for fun.”

The don’t bash into women, fortunately, but they also don’t talk to women much, creating tension in social situations where both are present. Although women here have equal rights, Icelandic men and women appear to live in different worlds, and this is apparent in their political parties. The Independence Party is mostly male while the Social Democrats are mostly female..The new Prime Minister, Johanna Sigurdardottir, is a Social Democrat.

Women have important jobs in Iceland, but hardly any became bankers or hedge fund operators or traders. Many of Iceland’s financial high-flyers came from the ranks of fishermen. What brought Iceland from being one of the poorest nations in Europe to one of the richest was innovation in the country’s fishing industry in the 1970s. Fishermen were assigned quotas based on their previous catch. Those who preferred not to fish could sell their quota to someone else. One could also take one’s quota to the bank and borrow on it. Fish, writes Lewis, “had not only been privatized; they had been securitized.”

As Iceland became rich, education became a priority. The country paid students for studying abroad and increasing numbers of Icelanders earned Ph.Ds. Those with Ph.Ds really had nowhere to go until the country turned to investment banking.

Meanwhile, though, in 2004, Iceland turned to a new industry, smelting aluminum, seemingly a natural because of the rich store of thermal power under the ground. The aluminum plants needed workers who would follow the rules and do what they were told, however, this was not a job description that fit the Icelandic male. An Icelandic fisherman is a competitive risk-taker, following in the path of long revered heroes of the Sagas, and now even the fishermen were well educated. It was almost inevitable that they would become investment bankers and hedge fund managers.

Making money looked easy, and for a while, it was. Money was easy to borrow for currency trading and buying up foreign assets. The trouble was, those new to the game often paid too much for the assets they bought and didn’t take time to analyze what they were buying.

Where were women in all this? Nearly all avoided jobs involving risk. One, Kristin Petursdottir, who was deputy CEO of a major bank, hated the culture and called it a “pool of sharks.” She quit to start a financial services company run by women. After the crash, it became one of the few surviving financial firms. Even men now come to her as customers.

A Book for All Seasons

Imagine healing a broken heart by living three months each in three exotic locales! That’s what Elizabeth Gilbert writes about in Eat, Pray, Love: One Woman’s Search for Everything Across Italy, India and Indonesia. I opened it not knowing what to expect, and while I don’t always enjoy books that make it to the best seller list, this one was a delight - funny, sensitive and finally, wise. 

Having undergone a protracted divorce followed by a love affair that ended badly, the thirty-something author takes off on her travels. With Rome as her first stop, she takes Italian lessons and indulges in gastronomic pleasures. I wish she had explored a greater variety of Italian foods but she’s no gourmet, just a young American with a taste for pizza and a need for comfort food. 

Her next stop is an ashram in India, where she arises before dawn to meditate, becomes friends with other acolytes and gains some serenity. Living in an ashram isn’t for everybody, to be sure, but the spiritual part of Gilbert’s journey is highly accessible. Finally she lands in Bali where she finds joy, generosity and even love, though not right away.  I found myself thinking, well, she could have just gone to Brazil in the first place....  Nevertheless, the section on Bali is where she shows the greatest sensitivity to the local culture.

I wish I had written about this book before Christmas or at least before Valentine’s Day because it would make a good gift for either of those occasions. It’s still not too late to buy a copy and share it or give it to some one special. I’d advise ignoring the negative reviews on Amazon but you can find out more about Elizabeth Gilbert at www.elizabethgilbert.com/ At her site, you’ll also learn what happened to her after the book ended, but please, don’t look until you’ve read the book. For those with a special interest in Indonesia, see Cool Maps of Indonesia: An Unauthorized View of the Land of EAT, PRAY, LOVE.