GM: What's the Problem and Why Should the Government Help?

GM is currently under tremendous pressure and its in the survival mode. Should the government help it? Should it be bailed out? How are the automakers different from any other industry that is currently in the cyclical downturn? These questions don't even scratch the surface of the issues at hand. Let's work through this issue in a couple of simple steps.

Why is GM in trouble right now?

• Demand for cars slipped more than 20%.
• GM's market share has been dramatically reduced because of the shift in demand due to high oil prices.
• Product marketing hasn't been effective, even though quality of their products has been on the rise during the past decade.
• Lack of design innovation relative to its peers.
• Burden of the healthcare and pension benefits for retirees. GM waited too long to restructure the contract with UAW. This is probably one of the more important impediments to the company's financial stability.
• UAW doesn't understand the realities of the marketplace and held a hard-line position until the company that employs tens of thousands of its members was on the brink of disaster to soften its terms. Now it may end up with not having all that many members left to pay the dues.
• GM's manufacturing and operational management has been inefficient for decades and it hasn't been up to par to compete with the Japanese automakers who are significantly leaner. It's not all management's fault as many of the contracts and sourcing relationships have been established decades ago and it would not be easy to restructure the suppliers' network to maximize efficiency.
• Pretty much all of these points apply to Ford and Chrysler as well, they just happened to be slightly better positioned financially, which only delays the inevitable. Whether it was luck or skill on their part, I'm not in a position to judge that.

What will happen if the government won't help GM?

• GM can't survive this crisis without outside assistance and the only source of help due to the current state of the capital markets is government.
• GM would have to file bankruptcy. If GM files bankruptcy under Chapter 11 and goes into restructuring mode, someone will have to provide debtor-in-possession financing in order for the company to emerge from the Chapter 11 filing. Again, only government would be able to provide that financing. If GM is for some reason forced to file bankruptcy under Chapter 7, it pretty much means liquidation. I don't imagine there would be many buyers for their assets and those who would buy wouldn't pay a fair price for the assets. So, debtors would be left with pennies on the dollar.
• GM would probably close most of it's plants in the U.S., layoff most of its 240,000 employees.
• GM's first-tier suppliers would lay off many of it's 1 million employees. Ripple effect from the decreased spending from ex-employees would go through the economy like tsunami, slashing jobs in the retail and service sectors. Such layoffs would undoubtedly push the unemployment rate towards the 10% mark nationally and even higher in the states with auto plants such as Michigan, Ohio, Indiana, Illinois, and Missouri
• GM's sales would go even lower since consumers would prefer to buy a car from a company that will be there to provide the warranty several years from now and whose cars' resale value would hold up down the road.
• Many of the GM's 14,000 dealers would have to close their doors due to lack demand for GM cars and because of GM's restructuring of its dealer network, which is something they should have done quite a while ago.

The bottom line is that GM can't survive as an ongoing entity without significant federal assistance and the taxpayers are on the hook for billions, for everything from lost tax revenues to higher unemployment costs to taking over GM's pension obligations. Basically, the decision that Washington has to make is whether to pay for GM's survival or for its funeral - it's not a question of whether the GM deserves aid or not.

Additional Resources:

• Is General Motors Worth Saving?
• GM failure: The shockwave
• Why We Shouldn't Bail Out Detroit
• White House says Democrats heading for "gridlock" on autos
• GM loss would be ultimate blow to U.S. prestige
• No Free Lunch - Congress must demand radical reform in return for any bailout of GM.
• The New Oil Paradigm No One Is Talking About

QikReview: Fund Picks and Allocation Targets

After reviewing all the available funds in the previous posts, I was able to pick three funds that provide high quality management and deliver solid returns as compared with their category peers and other funds under review. I also believe that these funds will provide a good allocation: domestic stocks, international stocks, and bonds.

45% Dodge & Cox Stock (DODGX) - I think the domestic market will bounce back sooner than overseas markets will, especially Europe.

30% American Funds EuroPacific Growth (AEPGX.LW) - This fund will provide good exposure to the international markets once they do bounce back while limiting risk in the meantime.

25% Goldman Sachs High Yield (GSHIX) - This fund's goal is to cushion the stock holdings' volatility while not capping the overall returns by providing higher than average yield.

Full List of Current Series of 401(k) Fund Reviews:

• Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
• Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
• Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
• Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
• Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
• Fund Picks and Allocation Targets

QikReview: Goldman Sachs High Yield, Morgan Stanley Small Growth

Continuing with the series of (401)k funds reviews, below are reviews of the Goldman Sachs High Yield and Morgan Stanley Institutional Small Growth funds.

Goldman Sachs High Yield (GSHIX)

Category: High Yield Bond
Rating: 4
Capital Gains Exposure: -43%
Assets: $3.128 bil
Expense Ratio: 0.73%
Turnover Ratio: 11%
Yield: 11.77%
Redemption Period: 60 days
Redemption Fee: 2%
3-Year Total Cost: $240
Minimum Investment: $10,000,000
Comments: This fund has 86% in Bonds and 12% in Cash. It holds AAA (14), BBB (5), BB (24), B (44), and Below B (13) quality bonds. The bonds are in the following sectors: Corporate (75) and Foreign Corp (13). This fund performs well relative to it's category. It's ranked in the top 10% for it's category. This is a solid fund that is fairly cheap and is more likely to do well than not. Although I'm not too keen investing into bonds right now, this fund is yielding quite a bit to compensate for that risk.
Grade: B-

Morgan Stanley Institutional Small Growth (MSSGX)

Category: Small Growth
Rating: 4
Capital Gains Exposure: -41%
Assets: $1.055 bil
Expense Ratio: 1.01%
Turnover Ratio: 76%
Yield: 0.0%
Redemption Period: 30 days
Redemption Fee: 2%
3-Year Total Cost: $322
Minimum Investment: closed
Comments: This fund invests into Medium (27), Small (64), and Micro (9) companies. It invests into the following sectors: Healthcare (11), Consumer Services (19), Business Services (25), Financials (6), Consumer goods (11), Industrial Materials (9), and Energy (10). The fund has 65 holdings and keeps 35% of assets in the top ten holdings. This fund's performance is mediocre, but not terrible. It is ranked in the top 20% percent peers for the 10-year period and has returned annualized 7% over that same period. This is an OK fund, but I would prefer to invest in a steller small-cap fund if I were to invest in the small-caps at all. Small-caps are bound to underperform the market in the near future.
Grade: C-

Full List of Current Series of 401(k) Fund Reviews:

• Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
• Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
• Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
• Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
• Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
• Fund Picks and Allocation Targets

QikReview: Moderate Allocation Funds - Dodge & Cox, Putnam

Continuing with the series of (401)k funds reviews, below are reviews of the Moderate Allocation funds.

Dodge & Cox Balanced (DODBX)

Category: Moderate Allocation
Rating: 4
Capital Gains Exposure: -32%
Assets: $15.613 bil
Expense Ratio: 0.53%
Turnover Ratio: 27%
Yield: 3.63%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $170
Minimum Investment: $2,500
Comments: This fund invests into stocks (72) and Bonds (27). It invests into Giant (51), Large (37), and Medium (11) companies. It invests into the following sectors Hardware (12), Media (12), Healthcare (25), Consumer Services (7), Financials (14), Consumer Goods (5), Industrial Materials (10), and Energy (8). The fund holds 82 stocks and 277 bonds; it has 25% of assets in the top ten holdings. I prefer more concentrated portoflios, but this fund does hold many solid stocks - among it's top picks are Novartis, Wells Fargo, WellPoint, GE, and Shlumberger. This fund ranks in the top 5% in it's category for the 10-year period while in the middle of the pack for other time periods. This is a solid fund with a pretty low expense ratio and an experienced management team.
Grade: B

George Putnam Fund of Boston (PGEOX.LW)

Category: Moderate Allocation
Rating: 2
Capital Gains Exposure: N/A
Assets: $1.969 bil
Expense Ratio: 0.98%
Turnover Ratio: 124%
Yield: 5.6%
Redemption Period: 7 days
Redemption Fee: 1%
3-Year Total Cost: $863
Minimum Investment: $500
Comments: It invests into Giant (38), Large (35), and Medium (21) companies. This fund has 51% in stocks, 81% in bonds, and borrows 28% cash. This fund invests into the following sectors: Hardware (8), Telecom (8), Healthcare (11), Consumer Services (5), Financials (23), Consumer Goods (9), Industrial Materials (20), Energy (6), and Utilities (6). This fund has 184 stock holdings and 1,671 bond holdings. It has 37% of assets in the top ten holdings. This fund's performance relative to peers has been rather dismal as it returned 0.77% over the 10-year period. This charges a high fee for worse than the market performance. Not worth it.
Grade: D-

Full List of Current Series of 401(k) Fund Reviews:

• Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
• Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
• Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
• Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
• Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
• Fund Picks and Allocation Targets

American Express: Now a Bank Holding Company

Today AmEx became a bank holding company. It became a third financial company (after Goldman Sachs and Morgan Stanley) to convert to a bank holding company since the global credit crunch worsened in September. This change will allow the company to borrow directly from the Fed at a much lower rate than before, but this will also subject it to greater federal regulations.

Although this is a positive move for American Express, it also shows how desperate it was to improve its funding sources. Even with the Fed's latest efforts to boost the commercial paper activity, many companies find themselves left high and dry with limited access to funding. AmEx is one of the more financially sound companies and yet it was forced to become a bank holding company, a move significantly changing their long-term growth strategies and possibly limiting opportunities for growth because of the increased oversight. One can only imagine how many more companies are out there trying to become bank holding companies as well and may fail if they don't achieve that status.

What I am wondering about and what I couldn't find an answer for on the Web is this: how do companies get out of being a bank holding entity and is there a history of such actions? If so, here is what these companies can do: shore up their balance sheets, stabilize operations and wait out the credit crunch crisis. Realistically, it will take 5-10 years for the companies like American Express, Goldman Sachs, and Morgan Stanley to be in a position where they don't need to be bank holding companies anymore. So, at that point they could probably sell off their banking units for a tidy profit and grow their core businesses (e.g., businesses that were considered core to their operations before this crisis) at a much faster pace than they could while being bank holding companies. Is this really such a crazy idea?

Additional Resources:

• American Express Banks On The Fed
• Fed OKs American Express as bank holding company
• American Express to Be Bank Holding Company
• AmEx becomes bank to stabilize funding

QikReview: Mid-Cap Funds - Alger, Ariel

Continuing with the series of (401)k funds reviews, below are reviews of the Mid-Cap funds.

Alger MidCap Growth Institutional (ALMRX)

Category: Mid-Cap Growth
Rating: 3
Capital Gains Exposure: -40%
Assets: $0.912 bil
Expense Ratio: 1.17%
Turnover Ratio: 274%
Yield: 0.0%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $372
Minimum Investment: $0
Comments: Does not do very well during recessions, but comes back somewhat strongly. Has 99 holdings and has only 23% of assets in the top ten holdings. Not very expensive. This fund invests into Giant (4), Large (27), Medium (54), Small (12), and Micro (3) companies. It invests into the following sectors Software (10), Hardware (11), Healthcare (11), Consumer Services (8), Financial Services (8), Consumer Goods (8), Industrial Materials (17), and Energy (18). I'm not impressed with this fund because of its mediocre performance.
Grade: C-

Ariel (ARGFX)

Category: Mid-Cap Blend
Rating: 1
Capital Gains Exposure: -5%
Assets: $1.296 bil
Expense Ratio: 1.03%
Turnover Ratio: 25%
Yield: 0.47%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $328
Minimum Investment: $1,000
Comments: This is clearly a long-term oriented fund: it has only 32 holdings with a turnover of 25%. This fund invests into Medium (80) and Small (16) companies. It invests into the following sectors Media (6), Healthcare (7), Consumer Services (6), Business Services (18), Financials (26), Consumer Goods (20), and Industrial Materials (17). Ranking-wise, this fund is currently scratching the bottom of the barrel - it hasn't enjoyed any gains at the end of the '90s (although didn't lose much during the last recession either) and it hasn't experienced any kind of significant gains during this last bull market and now it lost over 40% year-to-date. That is some terrible performance. Of course, this may also mean that this fund will bounce back rather nicely if you start investing in it nice. I've looked at their holdings and they seem more solid than not (from the names that I recognized). In conclusion, this fund's defensive style severely limits its upside in the bull market and yet provides no protection in the bear market - so far this year it has lost more than 90% of the competing funds.
Grade: D+

Full List of Current Series of 401(k) Fund Reviews:

• Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
• Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
• Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
• Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
• Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
• Fund Picks and Allocation Targets

QikReview: Foreign Large-Cap Funds - AllianceBernstein, American

Continuing with the series of (401)k funds reviews, below are reviews of the Foreign Large-Cap funds.

AllianceBernstein International (AIZAX.LW)

Category: Foreign Large Blend
Rating: 1
Capital Gains Exposure: -
Assets: $2.188 bil
Expense Ratio: 1.42%
Turnover Ratio: 59%
Yield: 1.92%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $855
Minimum Investment: $2,500
Comments: This fund invests into Giant (69), Large (27), and Medium (4) companies. It invests into the following sectors Telecom (7), Healthcare (9), Business Services (5), Financial Services (22), Consumer Goods (12), Industrial Materials (20), Energy (13), and Utilities (6). The split between countries is: Asia ex-Japan (5), UK (27), Japan (15), Germany (12), France (12), and Switzerland (10). The fund has only a 5-year history, which in itself is unimpressive and yet the performance during those 5 years has been even less impressive. It consistently ranks towards the bottom of the pack. It has 130 holdings and only 20% of assets in the top ten holdings. I don't really like it's sector not geographical allocation; the performance has been week and in addition to everything else, the fund is pretty expensive at $855 per $10,000 per 3-years.
Grade: D

American Funds EuroPacific Growth (AEPGX.LW)

Category: Foreign Large Blend
Rating: 5
Capital Gains Exposure: -
Assets: $71.157 bil
Expense Ratio: 0.74%
Turnover Ratio: 38%
Yield: 2.45%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $813
Minimum Investment: $250
Comments: This fund invests into Giant (53), Large (40), and Medium (7) companies. It invests into the following sectors Hardware (6), Telecom (10), Healthcare (10), Consumer Services (6), Financial Services (17), Consumer Goods (13), Industrial Materials (20), Energy (8), and Utilities (6). The split between countries is: Asia ex-Japan (4), UK (7), Japan (7), Germany (10), France (10), Switzerland (8), and Latin America (6). It has a huge number of holdings, 303, and only 18.7% in the top ten holdings. This fund is ranked in the top 10% for the 3-, 5-, and 10-year periods, but then again at this time it only takes a 6% total return to be ranked that high for the 10-year period. Essentially, this is a foreign index fund, albeit an expensive one. I like the allocation of this fund, but I'm not sure if it warrants such high fees.
Grade: B-

Full List of Current Series of 401(k) Fund Reviews:

• Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
• Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
• Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
• Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
• Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
• Fund Picks and Allocation Targets

QikReview: Large-Cap Funds - American, Dodge & Cox, Putnam, State Street

I was asked to review 401(k) funds for a particular retirement account. In the subsequent series of posts, I've listed reviews of the available funds, my subjective grade for these funds, and my suggested allocation into these funds. In my reviews, "Rating" refers to the Morningstar rating of these funds. These reviews are starting with Large-Caps and then moving on to Foreign Large-Caps, Mid-Caps, Moderate Allocation, and ending with High-Yield Bond and Small-Growth funds.

American Funds Growth (HVRBX)

Category: Large Growth
Rating: Not Rated
Capital Gains Exposure: -
Assets: $0.093 bil
Expense Ratio: 0.88%
Turnover Ratio: N/A
Yield: N/A
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $281
Minimum Investment: $0.0
Comments: This fund has just been created in May, 2008. Naturally, it has already lost about 35%. So, not only does it have an extremely short track record, that records also happens to be horrible. It invests into Giant (42), Large (33), and Medium (22) companies. This fund invests into the following sectors Software (5), Hardware (10), Healthcare (8), Consumer Services (9), Business Services (8), Financials (8), Industrial Materials (20), and Energy (20). 100% of this fund's assets are invested into American Funds Ins Ser Growth, fund which I have not been able to find on Morningstar.
Grade: E

Dodge & Cox Stock (DODGX)

Category: Large Value
Rating: 4
Capital Gains Exposure: -39%
Assets: $36.200 bil
Expense Ratio: 0.52%
Turnover Ratio: 27%
Yield: 2.12%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $167
Minimum Investment: $2,500
Comments: It invests into Giant (51), Large (37), and Medium (11) companies. This fund invests into the following sectors: Hardware (13), Media (12), Healthcare (25), Consumer Services (7), Financials (14), Consumer Goods (5), Industrial Materials (10), and Energy (8). The fund holds 82 stocks and 277 bonds; it has 25% of assets in the top ten holdings. I prefer more concentrated portoflios, but this fund does hold many solid stocks - among it's top picks are Novartis, Wells Fargo, WellPoint, GE, and Shlumberger. This fund ranks in the top 2% in it's category for the 10-year period while in the middle of the pack for other time periods. This fund's portfolio is identical to the Dodge & Cox Balanced stock portfolio except for the lack of bonds. I don't think bonds allocation will be helpful from point on until we are close to next bull market's pick, hence the slighly higher grade.
Grade: B+

Putnam Equity Income (PEYAX.LW)

Category: Large Value
Rating: 4
Capital Gains Exposure: N/A
Assets: $2.330 bil
Expense Ratio: 0.98%
Turnover Ratio: 73%
Yield: 2.17%
Redemption Period: 7 days
Redemption Fee: 1%
3-Year Total Cost: $908
Minimum Investment: $500
Comments: This fund invests into Giant (46), Large (30), and Medium (20) companies. It invests into the following sectors: Hardware (6), Telecom (8), Healthcare (12), Financials (27), Consumer Goods (9), Industrial Materials (10), Energy (18), and Utilities (5). This fund has 99 holdings and keeps 35% of assets in the top ten holdings. This fund performs relatively well with a ranking in the top 25% percentile and delivering 3.26 over the 10-year period. In addition to okay performance it's also very expensive for its caregory.
Grade: D

State Street Equity 500 Index Service (STBIX)

Category: Large Blend
Rating: 3
Capital Gains Exposure: -22%
Assets: $0.167 bil
Expense Ratio: 0.70%
Turnover Ratio: 12%
Yield: 2.57%
Redemption Period: 0 days
Redemption Fee: 0%
3-Year Total Cost: $311
Minimum Investment: $25,000,000
Comments: This fund tracks S&P 500 companies. Index fund concept is good, but this fund charges higher than average fee for a simple index fund.
Grade: C

Full List of Current Series of 401(k) Fund Reviews:

• Introduction and Large-Cap Funds - American Funds Growth, Dodge & Cox Stock, Putnam Equity Income, State Street Equity 500 Index Service
• Foreign Large-Cap Funds - AllianceBernstein International, American Funds EuroPacific Growth
• Mid-Cap Funds - Alger MidCap Growth Institutional, Ariel
• Moderate Allocation Funds - Dodge & Cox Balanced, George Putnam Fund of Boston
• Goldman Sachs High Yield, Morgan Stanley Institutional Small Growth
• Fund Picks and Allocation Targets

Traits of a Successful Speculator - "Reminiscences of a Stock Operator"

This final excerpt from the "Reminiscences of a Stock Operator" provides a very good description of what trais a successfull speculator/trader must possess. As with most of the gems from this book, this is applicable to long-term investors as well, not just traders.

"Observation, experience, memory and mathematics these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man's unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets. After years at the game it becomes a habit to keep posted. He acts almost automatically. He acquires the invaluable professional attitude and that enables him to beat the game at times! This difference between the professional and the amateur or occasional trader cannot be over emphasized. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures.

A speculator must have faith in himself and in his judgment. The late Dickson G. Watts, ex-President of the New York Cotton Exchange and famous author of "Speculation as a Fine Art," says that courage in a speculator is merely confidence to act on the decision of his mind. With me, I cannot fear to be wrong because I never think I am wrong until I am proven wrong. In fact, I am uncomfortable unless I am capitalizing my experience. The course of the market at a given time does not necessarily prove me wrong. It is the character of the advance or of the decline that determines for me the correctness or the fallacy of my market position. I can only rise by knowledge. If I fall it must be by my own blunders."

Virtual Funds: Technology Fund's Ranking/Performance in Q3 '08 and Overall

Technology stocks have held up relatively well, especially the blue chip companies. I think this sector's performance will be scattered all over the board, some companies will do well while others will suffer for a prolonged period of time. So, it's a good sector to sift through, but you have to carefully assess how the overall economic conditions may influence your picks' earning power.

Orange line in the chart below shows how my Technology Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

As you can see, this fund is currently stuck in the middle-of-the-pack performance group, which is not a terrible place to be, but not where I'd like to be either. I expect a stronger relative performance from this fund in the coming quarters as I will make an effort to manage it more actively.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I have not changed the picks much - turnover is only 15% since the fund's inception. I plan to shuffle around a good number of these holdings in the upcoming two quarters though. Below are brief profiles of these stocks. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

Accenture (ACN) - With 170,000 employees in 150 offices and 49 countries worldwide, Accenture is a leading provider of IT consulting and outsourcing services to Fortune 100 companies and governments around the globe. About 40% of revenues come from North America. Consulting contributes 60% of total revenue. The firm's business is broadly divided into five operating groups: communications and high-tech, financial services, products, resources, and government. (Source: Morningstar)

Applied Materials (AMAT) - World's largest supplier of semiconductor manufacturing equipment. The firm's systems are used in the chemical vapor deposition, physical vapor deposition, and electroplating steps of the chip-fabrication process. Applied also supplies etching, chemical mechanical polishing, and wafer- and reticle-inspection systems, as well as critical-dimension measurement and defect-inspection scanning electron microscopes. (Source: Morningstar)

Quality Systems (QSII) - Markets information-processing systems to medical and dental group practices, as well as to physician hospital organizations and health maintenance organizations. Its systems are used to manage medical records, treatment planning, appointment scheduling, third-party reimbursement, insurance claims, and other functions. The company also provides hardware and software maintenance and support services. (Source: Morningstar)

Cisco (CSCO) - World's leading supplier of data networking equipment and software. Its products include routers, switches, access equipment, and network-management software that allow data communication among dispersed computer networks. The firm has also entered newer markets, such as home networking, security devices, storage technology, and Internet-based telephony. Services account for about 16% of sales. (Source: Morningstar)

QLogic (QLGC) - Supplies a wide range of components and subsystems for computer storage networks. Customers include OEMs, value-added resellers, and systems integrators. The company focuses on engineering and product design and outsources manufacturing. Primary competitors include Emulex, Cisco, and Brocade. QLogic's top 10 customers account for 85% of revenue, with Hewlett-Packard constituting 20%. (Source: Morningstar)

EMC (EMC) - Leading provider of hardware, software, and services for enterprise network storage. Historically focused on proprietary storage hardware, the company has recently increased its focus on its software and services segments, which now account for more than 50% of revenue. EMC also owns approximately 85% of VMware, a leading provider of virtualization software. (Source: Morningstar)

SimpleTech (STEC) - Provides standard and custom computer-memory products. The company manufactures tools that connect memory cards and hard-drive upgrade kits to personal computers. Applications include desktop and notebook computers, servers, routers, switches, digital cameras, digital video recorders, digital audio players, personal digital assistants, and medical instruments. These systems are based on dynamic random access memory (DRAM), static random access memory (SRAM), and Flash memory technologies. Customers include Unisys and Cisco. (Source: Morningstar)

F5 Networks (FFIV) - Provides products that help manage growing network traffic, application complexity, and security concerns. F5's customer base has evolved from an initial focus on Internet service providers, Web hosters, and e-commerce sites to a current emphasis on the corporate IT market. Customers include Deutsche Telekom, Citigroup, eBay, General Electric, and General Motors. (Source: Morningstar)

SK Telecom (SKM) - Largest mobile-phone operator in South Korea, with more than 22.3 million customers (50.5% market share). SK also provides wireless services through joint ventures and subsidiaries in the United States, Vietnam, China, and Mongolia. SK also owns approximately 44% of Hanaro Telecom, the country's second-largest fixed-line operator. SK Group, Korea's third-largest conglomerate, owns approximately a quarter of SK Telecom. (Source: Morningstar)

Diebold (DBD) - Builds, sells, and services ATMs, security products and systems, and computerized voting machines. Two thirds of Diebold's revenue comes from the sale and service of ATMs, split about equally between the two. Most of its remaining sales come from security offerings and election systems. (Source: Morningstar)

WNS (WNS) - One of the leading end-to-end providers of outsourced business process outsourcing services to clients in the United States and the United Kingdom. The company was founded in 1996 as an in-house BPO unit of British Airways and started serving third-party clients in fiscal 2003. The company's largest offerings are in the travel (37% of revenue) and financial (39% of revenue) industries. WNS has about 22,000 employees, with almost its entire workforce located in India. (Source: Morningstar)

Maxim Integrated Products (MXIM) - Makes high-performance analog and mixed-signal integrated circuits. The company offers a wide range of products serving a host of analog-intensive applications, including power management and data conversion. Maxim supplies its diverse array of about 5,000 circuits to a broad base of customers in end markets including communications, computing, industrial, and consumers. Roughly 70% of the firm's sales are based outside the U.S. (Source: Morningstar)

Corning (GLW) - Leading designer and manufacturing of glass and ceramic substrates found in liquid crystal displays, fiber-optic cables, automobiles, and laboratory products. The company has five primary divisions--display technologies, telecommunications, environmental technologies, specialty materials, and life sciences--but most of its revenues stem from its display technologies and telecommunications segments, which generated about 45% and 30% of sales, respectively. (Source: Morningstar)

Siemens (SI) - A diversified global manufacturer operating in three sectors; industry, energy, and healthcare. About 54% of revenue comes from the industrial segment, which features Siemens automation and drive technologies. Within the energy segment, Siemens produces turbines used in a variety of power plant applications. (Source: Morningstar)

Presidential Election: What May Change After Today

The election day is finally here and so is the end of all the political ads on TV, radio, and the Internet. Finally, it's back to the real life now as opposed to listening to each candidate's pipe dreams.

Today's election's outcome will be of significance for all of us for years to come, regardless of who will be elected. Of course, I don't see any immediate changes: government's budget for 2009 is already set and it will take time for any of the new President's policies to get enacted. Market, on the other hand, doesn't really care what changes will actually happen it just wants this uncertainty (Presidential election) to be done with so that all the market strategists can start adjusting their models, etc.

Again, no matter who gets elected, the market will treat end of the election as a positive sign even if we'll see some overreactions (up or down) within the next few days or even weeks. So, I would buckle up and get ready for the late-year rally.

Additional Resources:

• US election to benefit some industries, harm others
• Votes Are as Important as Investments
• It's too late to bet on the election

ETFs Are Becoming More Popular Than Mutual Funds

A recent article on Morningstar has highlighted a very interesting trend - ETFs are attracting net inflows while mutual funds are experiencing substantial net outflows during the past few months and this year overall. It is not surprising that people are pulling money away from the actively managed mutual funds given that even some of the safest ones, money market mutual funds, can't avoid a negative return. Of course, then we also have a huge percentage of the funds (probably most of them) who fared even worse than the S&P 500 since many of them tried to make riskier bets (such as financials) by calling false bottoms or trying to make up for the horrendous performance earlier in the year. Either way, no one should be surprised that mutual funds are seeing significant outflows of capital ($1.5 trillion net outflows in 2008 according to the Morningstar).

What I do find somewhat surprising is the rate at which ETFs are garnering assets. Morningstar estimates that year to date ETFs have attracted $82 billion in net inflows bringing the current total to $549 billion. That's a year to date growth of 15% in total assets in ETFs! Some of the theories that Morningstar has to explain this trend are:

1. Money aren't flowing into ETFs from the mutual funds alone, but also from the individual stock holdings. With the volatility being what it is nowadays, investors are switching into a more diversified type of asset that they count on to reduce daily volatility.


2. While people who hold mutual funds maybe cashing out or moving assets elsewhere because of the distrust in the active management, asset allocators who use ETFs for the same purposes in their portfolios are sticking to their strategies since they tend to be more sophisticated and patient investors. Therefore, ETF investors continue to contribute to their ETF holdings, while mutual fund investors are decreasing their assets in the mutual funds.
   


3. This is all part of a continuing trend of more investors switching into ETF products from the mutual funds for the purposes of tax efficiency and lower costs.
   

Another point that I find interesting is that just last year a number of articles popped up saying that this ETF frenzy isn't going to last, that the ETF bubble is brewing, that all these obscure ETFs (such as HealthShares Infectious Disease Index and Elliot Wave ETF) are signs of a late-stage bubble that is about to pop. Well, this bubble didn't pop, if anything, ETF product is now proving to be a wise asset allocation tool and a good diversifier.

Additional Resources:

• ETFs Continue to See Strong Inflows Despite the Market
• Who Needs 'Em? The List of Obscure ETFs Grows
• Mutual Funds or ETFs - Which to Choose?

Virtual Funds: Healthcare Fund's Ranking/Performance in Q3 '08 and Overall

Among all the sectors, healthcare has held up better than most. Of course, now, with the benefit of hindsight, various pundits and talking heads are pointing out that this is the safe haven with a lot of growth potential. What's the logic here? Since this sector has lost the least, it must grow the most now? Nonsense. If anything, now is probably not the time to invest in the healthcare considering the significance of upside potential in other, very beaten-down sectors. If you're nevertheless curious about what has done relatively well so far, here I will detail the performance of the virtual mutual fund I've set up for the Healthcare sector on the Marketocracy web site.

Orange line in the chart below shows how my Healthcare Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

Thanks to the very strong performance in the 3rd quarter, this fund is now highly ranked in the 6-months and 1-year periods. But then again, in the current market environment it's not about winning the most, but rather about losing the least. I do think that healthcare will do well in the 4th quarter after the presidential elections are over with. Markets hate uncertainty more than bad news and discount healthcare stocks accordingly. Once some of the uncertainty goes away, so will the discount on these stocks.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I have not changed the picks since the fund's inception, so the turnover is non-existent. I expect to add to my positions in several of these stocks since I still have $236K of Cash in this fund. Below are brief profiles of these stocks. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

Barr Pharmaceuticals (BRL) - Develops, manufactures, and sells generic and branded drugs through operating subsidiaries Barr Laboratories and Duramed Pharmaceuticals. Including Pliva, its product portfolio contains hundreds of generics and 25 proprietary pharmaceutical products. Barr acquired FEI Women's Health in November 2005 and Pliva in 2006. (Source: Morningstar)

Amgen (AMG) - A leader in biotechnology-based human therapeutics, with historical expertise in renal disease and cancer supportive care products. Flagship drugs include red blood cell boosters Epogen and Aranesp, immune system boosters Neupogen and Neulasta, and Enbrel for inflammatory diseases. Amgen introduced its first cancer therapeutic, Vectibix, in 2006, and late-stage development efforts range from osteoporosis treatments to cancer antibodies. (Source: Morningstar)

Johnson & Johnson (JNJ) - Ranks as the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents 40% of total sales, we expect patent losses to reduce this proportion to 30% over the next 10 years, with the remaining divisions picking up equal share. (Source: Morningstar)

Novartis (NVS) - Develops and manufactures health-care products within its four main operating segments, including branded pharmaceuticals, generic pharmaceuticals, diagnostic and vaccines, and consumer products. (Source: Morningstar)

Quest Diagnostics (DGX) - Leading independent provider of diagnostic testing, information, and services in the U.S. The company generates more than 90% of its revenue through clinical testing, anatomic pathology, esoteric testing, and substance abuse testing at its national network of 2,100 patient service centers. The firm also provides clinical trials testing, risk assessment services, and information technology solutions. (Source: Morningstar)

McKesson (MCK) - Leading distributor of pharmaceuticals, specialty drugs, medical and surgical supplies, and health and beauty care products in North America. McKesson's Technology Solutions segment provides software related to pharmacy services, medical records, patient care, and financial management. (Source: Morningstar)

Pfizer (PFE) - World's largest pharmaceutical firm, with annual sales near $50 billion. After the sale of its consumer health-care division to J&J, prescription drugs now account for more than 90% of sales. Top sellers include cholesterol-lowering Lipitor, Celebrex for arthritis, Viagra for impotence, and Lyrica for epilepsy and some types of neuropathic pain. Recently approved drugs with blockbuster potential include oncology drug Sutent and Chantix for smoking cessation. (Source: Morningstar)

GlaxoSmithKline (GSK) - Within the pharmaceutical industry, GlaxoSmithKline ranks second only to Pfizer in market capitalization. The company wields its might across multiple therapeutic classes, including cardiovascular, metabolic, respiratory, neurological, and antiviral, as well as vaccines and consumer products. Prescription drug and vaccine sales account for more than 85% of total sales. (Source: Morningstar)

Medtronic (MDT) - One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and artificial spinal discs. The company markets its products to health-care institutions and physicians in the United States and overseas. Foreign sales account for about 38% of the company's total sales. (Source: Morningstar)

Hospira (HSP) - One of the largest global specialty pharmaceutical and medication-delivery companies. It offers generic injectable drugs primarily to U.S. hospitals, integrated medication-delivery systems that provide infusion therapy and pain management, and contract-manufacturing services to biopharmaceutical companies. Hospira was spun off from Abbott Laboratories in April 2004 and purchased Mayne Pharma for $2 billion in February 2007. (Source: Morningstar)

UnitedHealth Group (UNH) - Provides health insurance and related services to about 70 million Americans. Products include risk-based health insurance, non-risk-based plan management for self-insured employers, Medicare Advantage, Medicaid, and SCHIP programs, pharmacy benefit and disease management, and database and consulting services. (Source: Morningstar)