Monday, May 21, 2007

Ignore the US Oil Fund ETF (USO), an ETF Failure

When it comes to exchange traded funds (ETFs) no two ETFs are alike. Also, not all are successful. For every S&P 500 Spyder (SPY) or Nasdaq Qs (QQQQ) there are several lightly traded ETFs. However, the one ETF that has failed investors consistently is the US Oil Fund ETF (USO). Investors have expected this ETF to trade in concert with the price of crude oil. However, nothing could be further from the truth. Unlike the Streetracks Gold ETF (GLD) which closely tracks the price of gold, the USO is a complex ETF which has failed to deliver. Since the USO relies on the use of derivative contracts rather than physical assets and gets caught up in the vagaries of the crude oil markets – such as price contango – the USO has a built in recipe for disappointment. If you want to use exchange traded instruments to take advantage of crude oil price movements then think twice. You are better off looking for an oil services or integrated oil stock that highly correlates with crude oil prices rather than playing around with the USO.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were short shares of SPY--- although positions can change at any time.

Friday, May 18, 2007

Stock Splits Are Likely to Decline in Frequency as Companies Favor Over $100 Priced Stocks

There is an interesting phenomenon in the financial markets which I believe will continue to gain traction and could have implications for investors for years to come. Now more than ever, companies are allowing their stock prices to trade and remain above $100 (or par) per share without splitting their shares to allow sub par prices.

For many years, I could only recall two companies which consistently had stocks which were priced above $100: Berkshire Hathaway (BRK/a, BRK/b) and Alleghany Corp (Y). Now I can name several of the core holdings for LakeView Asset Management, LLC which are above $100 with no indication that a split is forthcoming. These holdings are Google (GOOG), Sears Holdings (SHLD) and Goldman Sachs (GS). Many more companies are joining the ranks of over $100 priced stocks. With its recent move, Apple (AAPL) is well above $100 and despite the company having split its stock 2 for 1 on three occasions since 1987, I wonder whether AAPL will split its stock or become part of the new “century” stock issues.

While splitting a stock has no implication for an investor’s holdings or tax basis, it does have some secondary psychological effects upon investors and the markets. First, investors are trained to think in terms of round lots of shares 100, 200, etc. rather than dollar amounts when making an investment decision. Some investors would prefer buying 100 shares of a $45 stock than 1 share of a $450 stock such as GOOG even though GOOG is a better investment value than the other company’s stock. Second, bid / offer spreads will tend to widen in absolute terms but not in relative or percentage terms as the price rises. This becomes more apparent when the stock rises above $100. Third, the wider price swings in absolute terms for the century stocks will give an appearance of higher volatility and increased risk even though the price swings may be equivalent on a percentage basis. In other words, a $5 swing on a $150 stock seems more precipitous than a 50 cent move on a $15 stock. Finally, anyone who desires to enter into options related activity will require more capital since the minimum option contract for most stocks carries a multiplier of 100 shares per contract. This will scare away speculators and likely drive spreads and implied volatilities higher.

On the other hand there are some benefits to maintaining a high stock price and not splitting a stock. Higher stock prices will decrease speculative activity and likely keep shares in the hand of long term holders. Furthermore, higher stock prices can be excellent marketing tools for companies as the media attention that is paid to such issues provides greater brand recognition for a company and could enhance customer appeal.

I believe that we should expect to see an ever increasing population of stocks which will be trading above $100 in the years to come. This will be beneficial for long term shareholders but will require the undoing of a deeply rooted mindset that believes stock splits and lower stock prices are in investors’ best interests.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of AAPL, GOOG, GS and SHLD -- although positions can change at any time.

Tuesday, May 01, 2007

News Corp Acquisition of Dow Jones Is A Great Fit

News Corp (NWS) has made a $60 unsolicited bid for Dow Jones & Co. (DJ). I believe that this is a genius move on the part of Rupert Murdoch. Here’s why:

  • DJ owns the Dow Jones indexes of which the Dow Jones Industrials 30 stock index is the most recognized index in the world. It may not be the most tracked index or the benchmark of choice for performance measurement but it does carry a significant amount of brand recognition.
  • DJ has failed to exploit its indexes. On the other hand, McGraw Hill (MHP) has successfully marketed its Standard & Poor’s brand of indexes of which the S&P 500 (SPX/SPY) is the most widely known index and index of choice for stock advisor performance benchmarking. NWS will certainly expand the Dow Jones brand of indexes doing for Dow Jones what MHP has done for S&P.
  • NWS is busy preparing to launch its own cable business channel. With the Dow Jones indexes, NWS will have a crown jewel index to help integrate and cross-promote its many media holdings including the yet to be launched business channel.

While the NWS bid for DJ is high, nevertheless this will cause some consternation by General Electric (GE) owner of CNBC and Time Warner (TWX). TWX is in no position to make a large scale acquisition just yet. Thus with only the Dow Jones and Standard & Poor’s brands of indexes available to media conglomerates this leaves GE to make a higher big for DJ or set its sights on MHP to parry Murdoch’s move

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of SPY --- although positions can change at any time.