The ETF owns every security in the underlying index, and it does so absolutely all of the time. There is no thought of profit taking — and no manager to do it.

Is it clear that weighted indices have little concern with diversification — and why should they?

These are not real investment portfolios. They are sector-tracking mechanisms that have been securitized as Wall Street gambling devices. The three ETFs contained 206, 100, and 142 positions, respectively, but each had roughly 50% of the market value in the top 10 holdings.

And who do you think is influencing the fund creator’s weighting judgment?

For the rest of the story: http://kiawahgolfinvestmentseminars.net/Inv/index.cfm/18490

Steve Selengut

http://www.marketcycleinvestmentmanagement.com

http://www.valuestockindex.com

Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

But what is hedging all about in the first place?

Conspiracy theorists have their hands in the air. What’s that? Portfolio hedging strategies were created to expand the market for the first generation of derivative products— options and futures contracts. Hmmm, not so far fetched an idea, really. Just back up a bit and think about what they are trying to accomplish.

Hedges are designed to massage your market value numbers, a kind of security blanket that softens the highs and lows of the market cycle. But why focus on the fluff of transient market values in the first place? Cycles eventually correct themselves without the unnecessary drama, guesswork, risk, and trading fees.

It’s not the market value of the portfolio that is of primary importance. It’s the actual content of the portfolio and how you deal with the natural dynamics of the securities you own. Why can’t the media reinforce that kind of stuff instead of the emotion of the month?

If a portfolio has a semi-guaranteed “base income” of 4%, a 4% cushion (or hedge) is always in place, one that grows annually with proper asset allocation management, and adds to the market value in upward cycles— nah, too simple.

For the “rest of the story”:

http://kiawahgolfinvestmentseminars.net/Inv/index.cfm/6979

Steve Selengut

http://www.kiawahgolfinvestmentseminars.com/

http://www.sancoservices.com

Professional Portfolio Management since 1979

Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”

SAN FRANCISCO (MarketWatch) — Knowing that there can be too much of a good thing, many investors are wary about how stock and bond markets this year will follow their remarkable 2009 surge.

One thing’s for sure: This year won’t be like the last.

“We’re not going up 65% in the first nine months of this year like we did in the last nine months,” said Bob Doll, global chief investment officer of fundamental equities at investment manager BlackRock Inc.

Not that 2010 is likely to disappoint. “We’re back to an environment where the fundamentals have to come through,” Doll said. “Companies have to deliver the earnings. When it’s an earnings-driven market, there are gains but more muted gains.”

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Indeed, the biggest difference could be that stocks in 2010 are founded on tried-and-true measures — financial strength, earnings power — rather than high-octane speculation. That would favor big multinational firms in cyclical and growth industries that stand to benefit from economic improvement, namely technology, energy and industrials.

Technical and historical factors are at work as well. Sam Eisenstadt, former research chairman at Value Line Inc. and a veteran market observer, wrote in a recent MarketWatch commentary that evidence points to an above-average 2010 for stocks.

“After the first nine months of the stock market’s rally from recession lows, the average pace of the stock market’s advance clearly slowed,” he noted. “But, and this is crucial, the market tended nevertheless to continue rising.” He pegs the S&P 500 at 1320 by year-end.

The stoic and stalwart weren’t so beloved in 2009, when investors embraced higher-risk stocks and high-yield bonds. The defensive investment themes that made our list for 2009 were out of step in that respect, failing to anticipate that lower-quality holdings would be the most lucrative investments in 2009. Still, the strategies made money — with one glaring exception: Long-term Treasurys.

This year the bulls have a good chance to retain the upper hand, though not without setbacks, and investors will have to be more selective. In that light, here are 10 ways to position your portfolio through 2010:

1. Buy stocks with a global footprint

In a slow-growth environment, bigger is better. Big companies have the clout to counter adversity and capitalize on it. “Bigger” in this case also refers to companies of any size with a broad global presence. Global companies have diverse revenues and operations, which both insulates core businesses and fosters innovation and expansion.

U.S. companies in the past decade have been impressive examples of how to operate effectively overseas. Moreover, these companies are exporting their business to fast-growing emerging markets. Almost half of the revenues for companies in the Standard & Poor’s 500 stock-index (INDEX:SPX) now come from outside of the U.S.

“The demonstrated ability of S&P 500 companies to replicate their business [overseas] and earn attractive margins and returns abroad is the most important development of the decade,” wrote David Bianco, Bank of America Merrill Lynch’s chief U.S. equity strategist, in a December report.

“The global economy is going to continue to integrate,” added Gary Motyl, chief investment officer of Franklin Resources’ Templeton Global Equity Group. “Companies that have the best managements, strategies and balance sheets are going to take advantage of this.” He said Pfizer Inc. (NYSE:PFE) , is a good example. “What isn’t reflected in the stock price,” Motyl said, “is this company’s ability to move into the emerging markets.”

2. Use stock dividends as a bond substitute

Shares of companies with strong balance sheets and stable earnings growth are not only better-equipped to handle the economy’s waves, but their dividend income is a welcome alternative to the uncertainty swirling around bonds.

“Current dividend yields relative to bond yields provide an attractive opportunity for investors,” wrote Brian Belski, chief investment strategist at Oppenheimer Asset Management, in a recent research report. “A prolonged period of low bond yields may encourage investors to begin seeking alternative ways to increase income, and high-quality, dividend-paying stocks may be a solution.”

Oppenheimer’s recommended stocks fitting this bill include Johnson & Johnson (NYSE:JNJ) , AT&T Inc. (NYSE:T) , Abbott Laboratories (NYSE:ABT) and United Technologies Corp. (NYSE:UTX) .

3. Buy larger-cap index funds

Large-cap stocks lagged their small-cap and midcap counterparts in 2009, but many observers say that big firms’ time has come.

“Large, blue-chip companies are the last remaining pocket of undervaluation,” said Keith Goodard, co-manager of Capital Advisors Growth Fund (FUND:CIAOX) . “A basket of blue-chip companies with a 3% to 4% dividend is not a bad place to be.”

If larger-company U.S. stocks outperform small-caps, then shareholders could do well holding index mutual funds and exchange-traded funds that track plain-vanilla, large-cap benchmarks such as the S&P 500, the Dow Jones Industrial Average (INDEX:INDU) and the S&P 100 (INDEX:OEX) .

Many S&P 500 companies, for example, provide global exposure, high-quality earnings, seasoned management and attractive dividends — attributes that investors could increasingly value as the year unfolds.

“We believe that 2010 will be another positive year for stocks, and we established a 2010 price target of 1,300 for the S&P 500,” Oppenheimer’s Belski said. That would mean a gain of almost 14% for the index from Friday’s close of 1145 — a standout return for the market.

4. Stick with technology stocks

Technology funds were the best-performing U.S. sector in 2009, up about 63%, and technology is again the largest S&P 500 component.

That’s a cautionary note, but the sector’s earnings prospects are nonetheless strong. S&P analysts are among those upbeat on tech stocks. “The sector is poised to benefit from a healthier global economy, a notable PC replacement cycle and considerable international exposure,” the analysts noted in a recent report.

“They’ve got robust balance sheets, phenomenal free cash flow, and while the stocks have done well and valuations aren’t as cheap, there is room for them to outperform,” BlackRock’s Doll said of the tech sector. He favors computer software and services companies over hardware and semiconductor firms, namely Microsoft Corp. (NASDAQ:MSFT) , IBM (NYSE:IBM) and Oracle Corp. (NASDAQ:ORCL) .

5. Plug into the energy sector

Energy stocks have been on a tear so far this year. Energy-sector mutual funds are up almost 7% on average, on top of a 46% gain in 2009, according to investment researcher Morningstar Inc. The energy bulls are banking on a continuing global recovery and strong emerging-market demand, and strategists at Bank of America Merrill Lynch are squarely in that camp.

“Energy is our preferred global recovery play” and could be the year’s best-performing sector, depending on oil prices, Merrill strategists wrote in a recent research report.

S&P analysts are also bullish, particularly for companies in the integrated oil and gas industry. But it’s a tempered call that hinges in part on the global economy making a smooth transition from one that has relied on government stimulus to one that is earnings-driven. S&P’s favorite energy stocks include Chevron Corp. (NYSE:CVX) , Exxon Mobil Corp. (NYSE:XOM) and Superior Energy Services Inc. (NYSE:SPN)

6. Build on the industrials sector

S&P analysts also are upbeat on the industrials sector — another economic recovery bellwether.

“We recommend overweighting this sector, as we think the global economy will be stronger in 2010 than in 2009, and that this will be reflected in this cyclical sector’s profitability,” strategists wrote in a December report. “Also, from a valuation standpoint, we believe the sector offers better value than other economically sensitive areas.” Two industrials stocks S&P likes are Fastenal Co. (NASDAQ:FAST) and C.H. Robinson Worldwide Inc. (NASDAQ:CHRW)

At Oppenheimer, Belski favors industrials that tend to benefit in the early stages of an economic recovery, including building products and air freight. He also likes areas of the sector that profit from international growth, such as industrial machinery, aerospace and defense and electrical manufacturing. Domestically, Belski’s research points to companies involved with infrastructure projects.

Specific stocks on Oppenheimer’s list include FedEx Corp. (NYSE:FDX) , Danaher Corp. (NYSE:DHR) , Graco Inc. (NYSE:GGG) , Roper Industries Inc. (NYSE:ROP) , Pentair Inc. (NYSE:PNR) , Emerson Electric Co. (NYSE:EMR) and (NYSE:WM)

7. Take the M&A train

Companies in solid financial shape, flush with cash and little debt, are poised to take advantage of weaker rivals. They can grow earnings and market share organically or buy their way in; with many acquisition targets still priced attractively, corporate managements likely will choose the latter path.

“Companies are taking their business to where the opportunities are,” said Rob McIver, co-manager of Jensen Portfolio (FUND:JENSX) . “They’re setting up shop to expand their overseas presence or buying competitors through sensible acquisitions.”

“It’s an opportunity to leapfrog the competition,” added Templeton’s Motyl. “They’re positioning themselves for the next 10 or 20 years.”

“Mergers and acquisitions will come back to life,” said Steven DeSanctis, small-cap strategist at BofA Merrill Lynch, in a recent research report. He’s particularly bullish on M&A prospects for the cash-rich technology, health care and industrial sectors, where acquisitive-minded companies “do not need to borrow from the credit markets or issue additional shares.”

8. Pocket the U.S. dollar

The greenback is making a comeback. PowerShares DB US Dollar Index Bullish (NYSE:UUP) , a proxy for a stronger U.S. dollar, is up more than 2% in the past month, narrowing its 12-month loss to 8%, according to Morningstar.

“We remain optimistic on the U.S. dollar longer term,” Oppenheimer’s Belski noted. “Long-term currency movements are a reflection of relative global economic growth. Since the U.S. was the first economy into trouble, we expect it to be the first to recover and we believe that dollar strength will result.”

“The dollar remains the world’s reserve currency and safe haven,” added investment strategist Gary Shilling in his 2010 outlook report, though his recommendation is based on a bearish view that dollar strength will stem from global economic weakness.

9. Avoid long-term government bonds

Before the year is out, many analysts expect the Fed to whisk away the punchbowl and hike short-term interest rates. Already the markets are saying the U.S. government is keeping rates artificially low, as telegraphed through higher yields and corresponding lower prices for longer-dated Treasurys.

Long-term government funds were the worst-performing bond category of the past 12 months, down 14%, and experts don’t expect any improvement in the year ahead.

“Returns on long-term Treasurys … will be modestly negative,” BofA Merrill Lynch investment strategists said in a recent report. The firm sees the 10-year Treasury yielding 4.25% and the 30-year at 4.95% this year.

Merrill strategists recommend rotating out of U.S. Treasurys into U.S. investment-grade corporate credits. In addition, materials stocks and emerging-markets tend to outperform when Treasury yields rise, the firm said.

“All of the smoke signals we’re hearing from the various Fed presidents points to the unwinding of the liquidity we have put into the system; it’s just a question of when,” added Marilyn Cohen, president of Envision Capital Management, a Los Angeles-based bond specialist.

Cohen advised investments in shorter-term bonds, with a goal of reinvesting at higher yields later. She added: “Anybody who doesn’t read these smoke signals is going to be very sad.”

10. Embrace emerging-markets consumers

“The engine of growth has shifted to the emerging markets,” said Jim Awad, managing director of New York-based investment firm Zephyr Management. “You want to make emerging markets a core investment position — bigger than it’s ever been.”

Of course, emerging markets have enjoyed a tremendous run. Diversified emerging markets funds were up 74% in the year through Jan. 7 and averaged 15% annualized gains over five years, according to Morningstar.

While caution is in order from a valuation perspective, emerging markets are still eye-catching, especially if you focus on these regions’ growing middle class.

Rising living standards are prevalent across the developing world. Analysts at BofA Merrill Lynch suggest that investors tap into emerging-market consumers through shares of large-cap emerging-market financial and consumer-related stocks, as well as U.S., European and Japanese multinationals. A diversified emerging-markets ETF is worth considering, such as iShares MSCI Emerging Markets (NYSE:EEM) or Vanguard Emerging Markets Stock (NYSE:VWO) .

Another avenue to the emerging-market consumer, the Merrill analysts said, are energy providers and ETFs with exposure to U.S. energy and global energy stocks. Two examples: Energy Select Sector SPDR (NYSE:XLE) and iShares S&P Global Energy (NYSE:IXC) .

As Jose Costa Buck, manager of T. Rowe Price Latin America Fund (FUND:PRLAX) , noted in a recent report to shareholders about Brazil, the region’s largest economy: “Sensible economic, political and regulatory reforms have resulted in years of low inflation, economic stability and income growth that have brought millions of new consumers to the marketplace.”

Odds are the huge rebound since March has run its course. And even though it yields nothing, it’s time to raise cash.

Robert Lenzner

Nothing is screamingly cheap. The easy money has been made in both equities and fixed income. From the low point in March, it seems you can’t pick an asset class that hasn’t gained something in the area of 60%. That was some fear discount back in March.

During this universal recovery, as in most post-recessionary periods, lower-quality high-yield bonds have outperformed quality issues, and lots of smart guys who had the guts and money to buy them at the depths are cashing out–convinced that risks of continued exposure outweigh possible rewards of staying long.

“It’s past the time to lighten up, no reason to chase risk assets from currently lofty valuations,” says Paul McCulley, managing director at Pimco. “To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace.”
That’s what Guardian Life Insurance chief investment officer, Thomas G. Sorell, has been doing with his $30 billion portfolio after unexpected gains of 50% in high-yield bonds and leveraged bank loans that he purchased at distressed levels. The problem is that the yield on cash is zero. Cash is trash right now, and promises to continue to be.

Money market funds, according to latest numbers, are down half a trillion on the year. Stock mutual funds have drawn a measly $5 billion, while taxable bond funds have drawn almost $250 billion, and municipal bond funds $60 billion.

The big winners since the stock market bottomed in March have been emerging-markets stocks, up a stunning 99% on the iShares MSCI EAFE Index. Corporate junk bonds are up 50% as measured by the iShares iBoxx High Yield Corporate Bond ETF, while the iShares iBoxx Investment Grade Corporate Bond fund is up a comparatively modest 21%.

The truth is that few investors have taken the risk of equities. Most have taken a more conservative route, though the payoff has been commensurate with stocks. Even some municipal bond funds are up double-digits in the past year.

The reason is that the Fed has resolved to maintain “exceptionally low levels of the Federal funds rate for an extended period.” The yield spread is steepest in a very great time, allowing traders to borrow dollars at zero cost to hold securities yielding anywhere from 3.4% on 10-year Treasuries to 6% to 8% on riskier corporate paper.

So, what to do? Guardian Life’s Sorell is putting money to work at 5% in residential mortgage-backed bonds with three- to four-year maturities–a risk worth taking. He’s also ventured more bravely into 10-year BB corporate bonds yielding 8%–good if you feel comfortable taking the risk. That’s kosher for life insurance companies that can afford to hold to maturity.

In the bigger picture, though, there’s a major disconnect between stocks and Treasuries. Stocks are predicting a V-shaped recovery, while bonds are forecasting a more subdued U-shaped recovery–maybe even the dreaded W brand of a double-dip recession. I’m going to give greater weight to the clues I’m getting from the bond market, for I learned a valuable lesson in 2007 to scrutinize the credit markets as a hint of what’s in store for equity markets.

Yes, there is euphoria baked into the prices of gold and oil, and money is pouring into Asian markets threatening another possible bubble. Behind all the combustible elements that could trigger inflation are still sizable deflationary forces, like the potential disasters lurking in commercial U.S. real estate. Stock market bulls do not see the bearish signals being sent by the vulnerable part of the credit markets. Is there a trillion-dollar meltdown coming in commercial real estate, or has it already been discounted?

We are back to levels seen in 2007 and early 2008 in some credit markets, as represented by the action in the residential mortgage-backed bond index, ABX, a prime indicator of the credit quality of subprime real estate loans. The ABX Triple A index is only 31 cents on the dollar, having fallen 50% since May, contrary to the euphoria in equity and bond markets.

Even more worrisome is the Armageddon reading for the commercial real estate index, CMBX. The cost of protecting non-investment-grade mortgages on commercial projects has skyrocketed to 3250 basis points, more than three times greater than the cost of insuring commercial real estate loans back in June. It translates into an annual $3.2 million premium for insuring $10 million in real estate.

There’s also the peril of prolonged U.S. budget deficits. We’re talking about the long-term financial deterioration of the United States. Look at the Fed’s total net borrowing and lending in credit markets. The numbers of the domestic nonfinancial sector are down by over a trillion dollars; the private sector is deleveraging.

Meanwhile, the public sector–state, local and national governments–are adding debt. What does it mean if the U.S. loses its triple-A credit rating next year? Or if its $12 trillion in outstanding government securities become rated “junk bonds.”

Consider that the present value of Uncle Sam’s liabilities, including Social Security and Medicare, is four times the value of the nation’s economy. The cost of servicing that debt could be $2.5 trillion, according to William Cline of the Peterson Institute. That $2.5 trillion is equal to the nation’s entire cost of health care today.

Opines Richard Clarida, Pimco global strategic adviser, “The relative attractiveness of U.S. assets has [declined] and will likely continue to decline, and global investors may seek to rebalance away from their 60% increase in their net exposure to U.S. assets that occurred in 2008. This is negative for the dollar, and also likely negative for the relative performance of U.S. equities.”

So, if you trust the fellows who manage one of the largest accumulations in the world of other people’s money, you should bloody well not be greedy. Take your large profits that seemed hard to imagine a year ago.

The markets may have more run in them due to all the cash on the sidelines and the bullish sentiments evident on blogs and cable television.

But the bottom line is that it’s getting very hard to find obviously undervalued shares, or other assets for that matter. Don’t obsess right now about getting zero income; it’s better than double-digit losses.

Odds are the huge rebound since March has run its course. And even though it yields nothing, it’s time to raise cash.

Robert Lenzner

About Robert Lenzner

Nothing is screamingly cheap.

The easy money has been made in both equities and fixed income. From the low point in March, it seems you can’t pick an asset class that hasn’t gained something in the area of 60%. That was some fear discount back in March.

During this universal recovery, as in most post-recessionary periods, lower-quality high-yield bonds have outperformed quality issues, and lots of smart guys who had the guts and money to buy them at the depths are cashing out–convinced that risks of continued exposure outweigh possible rewards of staying long.