Archive for the 'Investing' Category

Investing – My Thoughts on the New T. Rowe Price Emerging Markets Local Currency Bond Fund

I am always looking for funds and investments that are both relatively conservative and align with my basic economic outlook.  Since I generally believe stocks are overvalued and are being held up entirely by government stimulus and central bank money printing, I am inclined to keep my modest investments “safe” in CDs, money markets and short term bond funds.  Unfortunately, we live in a time where interest rates are simply too low.  They are too low because they do not reflect the level of risk they carry.  The risk of future default and inflation are simply much higher than the 0% to 4% you can earn on bonds.  This brings me to the new T. Rowe Price Emerging Market Local Currency Fund.


Fund overview

At first glance, this fund certainly sounds interesting.  Here is a snippet from the web site:

Invests at least 80% of net assets in government and corporate bonds that are denominated in emerging markets currencies. The fund may invest in unrated or below investment grade bonds.

This fund offers investors the potential for high current income and capital appreciation by investing in bonds that are denominated in emerging markets currencies, and in derivative instruments that provide investment exposure to such securities. Emerging market bonds include fixed rate and floating rate bonds that are issued by governments, government agencies, and supranational organizations of, and corporate issuers located in or conducting the predominant part of the business activities in, the emerging market countries of Latin America, Asia, Europe, Africa, and the Middle East.

The key here is that this fund is playing on the “short US dollar” trade.  That is, if you believe the US Dollar will continue to go down in value, this fund should benefit.  The trick however is that all fiat currencies go down in value, just at different rates.  So the question is, will other currencies go down in value slower, relative to the dollar.  Additionally, this fund will benefit from interest paid on the foreign currency bonds it holds.

Why I am considering it

I am considering this fund for several reasons.

  1. I like the idea of diversifying some money out of US Dollars.
  2. The fund should earn a relatively high rate of interest, especially when compared to local US rates.
  3. The fund offers exposure to a bunch of countries, many of whom you don’t get in your typical international bond fund.

Why I am hesitant and risks to consider

The risks unfortunately are many and I am pretty hesitant to want to put too much money to work in this fund:

  1. The fund is brand new (started 5/31/2011) and its performance and management team have not been proven.
  2. The short US dollar trade is pretty crowded and if problems in Greece, Spain and other countries get worse this fund fund could lose value.
  3. If foreign central banks devalue their currencies faster than the Federal Reserve does ours, this fund could lose significant value.
  4. If global interest rates rise (and I think they will) this fund could lose significant value.
  5. This fund invests in countries that could face civil and political unrest.  This could lead to large defaults.

T. Rowe Price Logo

Be sure to read the funds prospectus before investing.


Important Note: This fund is not FDIC Insured and is not Bank Issued, Guaranteed or Underwritten.  This fund may lose value.  Investing in securities products involves risk, including possible loss of principal.  As interest rates rise, existing bond prices fall.

Disclosure: I do not currently own this fund, but I am considering a small investment in the future.  Invest at your own risk.

SEC May Charge Ratings Agencies with Fraud

The Wall Street Journal reported this morning that the SEC is considering fraud charges against the ratings agencies that were responsible for evaluating the CDOs, or collection of loans, that ultimately led to the sub-prime mortgage crisis.  For those of you who may not be familiar with the issue, part of the strategy of selling the mortgages was to bundle a variety of loans into a single package (the CDO).  The bundles contained high-risk and low-risk loans, but because they were bundled up in a package, the ratings agencies gave the package a solid rating despite the high-risk loans bundled within.

According to the paper, lawyers point out that regulators commonly accuse financial firms of fraud if they intentionally or recklessly misrepresent information.  The WSJ reports that the ratings agencies under investigation could face allegations that they “relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals or ignored clear signs of problems” in the mortgage industry.  By doing so, they rated the products too high and misled investors as to their quality.

The Big Short: Inside the Doomsday Machine a fascinating book about the mortgage crisis by Michael Lewis, paints the ratings agencies as naive rubes who fell prey to the sophisticated selling tactics of the Wall Street trading firms.  In it, he points out that ratings agencies are paid to rate securities, and their customers (in this case, banks) want good ratings.  To us, the conflict of interest is obvious.  According to the Wall Street Journal (emphasis added):

To be sure, the credit-rating companies aren’t responsible for the accuracy of the data supplied to them to rate securities. But they could be accused of ignoring obvious flaws in the data, such as it failing to reflect the deterioration of the mortgage market, according to lawyers.

We’d add to that: or failing to conduct enough of their own research to establish independence from the organization submitting the security to be rated.

The continuing lesson for us at BYM: Wall Street deals are naturally stacked in favor of those who are closest to the market and the deals (and therefore know the most).  Much like the recent round of tech IPOs, it’s the traders who are going to make the most money.  Organizations like Moody’s are merely selling their opinion, which may be as uninformed as the man on the street.  In fact, when these agencies are dead wrong, they use the first amendment as defense.  The WSJ reports:

In May, the credit-rating firms notched a legal victory when a U.S. Court of Appeals ruled that they can’t be held liable for their ratings of mortgage-backed securities. Their ratings, the judges wrote, were “merely opinions” and protected by the First Amendment, a defense the firms have often used in the past.

And all of this is fine.  It’s just business, and we shouldn’t stop people from running businesses.  Our objection is when these businesses are treated like civic institutions, to be trusted implicitly, and rescued at taxpayer expense.  While Moody’s and Standard & Poor’s didn’t get bailout money, there were definitely part of the problem, and part of the system that we’ve propped up.

As always, let the buyer beware.

Raters Drawing SEC Scrutiny (premium content) | The Wall Street Journal


Apparently We Don’t Have Enough Fraud at Home; We Import It Too

Clare Baldwin of Reuters ran an interesting article yesterday describing the swagger of two investors attending DealFlow Media’s annual conference, who say they are making a fortune shorting the stocks of fraudulent Chinese companies.  The conference dealt with so-called “reverse mergers” in which a (usually larger) private company is able to become public without going through an IPO by merging with a (usually smaller) public one.  Apparently, according to these investors at least, since the process avoids an IPO, it’s a ripe for fraud.

“It’s not a matter of whether they are fraudulent companies, it’s just a matter of who they are cheating,” 62-year-old Texas-based investor John Bird, who has been very public about his short positions, told a panel at DealFlow Media’s Reverse Merger Conference 2011.

and another:

“The realization I have come to recently is that it’s a giant Ponzi scheme. It’s all going down,” declared Rick Pearson, another investor who holds short positions on some Chinese stocks.

The article continues, pointing out that others at the conference feel like the whole issue is overblown, especially since the Chinese are easy targets:

Some pointed out that highly regarded companies — such as Warren Buffett’s Berkshire Hathaway — were created through reverse mergers.

They also argued that while some U.S.-listed Chinese companies may have had some problems, that is the exception and not the rule, and suggested China is an easy target because of American resentment about its growth as an economic power and its clout as a big owner of U.S. debt.

“I think with China, there’s a total overreaction,” said David Rees, a partner at Vincent & Rees law firm in Salt Lake City, Utah. “It’s an easy target.”

And of course, the motives of those bringing the reports of fraud to the market were called into question:

Most attendees were quick to say that they wanted fraud rooted out, but they became uncomfortable or even angry at the thought that someone could profit even if their allegations ultimately proved false.

“What it comes down to is, is the information truthful and accurate? And, also, do you have an economic motive or an opportunity, assuming it’s false…to profit personally because you’re intentionally putting out this false information?” asked Perrie Weiner, international co-chair of DLA Piper’s Securities Litigation practice.

Whether you are tempted to believe the shorts or the longs, this article reminded us of our general attitude towards the markets: it’s hard to know what is going on with any of these companies unless you are close to the deals.  Let the buyer beware.

Insight: For short sellers of Chinese stocks, it’s time to reap | Reuters

Thumbnail Photo Credit: Carmela Songer

Pandora’s Stock Is Not Looking So Hot

Cue the shareholder lawsuits in 3, 2, 1 …

Yesterday we posted about Pandora’s IPO and how the price action looked very similar to LinkedIn (LNKD).  Unfortunately, things just went from bad to worse.  The stock is down again hard today, with shares plunging almost 25% just today!

I think the “Investing Wisely” lessons learned here are simple:

  • The current wave of “Dot Com 2.0” IPOs are very risky at best
  • I would avoid being an early buyer of any future IPO such as Facebook or Groupon
  • Don’t try to “catch a falling knife”, based on fundamentals some analysis are calling for Pandora to got o about $5.80 a share!

Sick Pandora Chart


Pandora (P) IPO – Where Have We Seen This Before?

Is it just me, or does this chart and IPO price action look very familiar?

Pandora IPO Chart

Today Pandora (P) had their IPO.  Shares were priced at $16, but if you were the general public you had to get it around $20 this morning.  Unfortunately, the “got to own this stock now” crowd quickly ran the stock up to $25.58.  Where is it trading now?  About $18.70So if you bought at the top of that opening pop, you are now down $6.80 a share or down about 25%!

For reference, here is how you are now doing if you bought LNKD on the opening pop:


Is it any wonder companies like Groupon, Facebook and others are rushing to get their IPOs done?  Please be careful with this potential “Internet 2.0 bubble”.

Update: The Slope of Hope has made a similar observation, with more charts.


New Promotion

I have reported about previous promotions for a while now.  Generally, they have been for existing lenders and involve some form of 1-4% “rebate” on manual bids made to “Featured Listings”.

This week however, seems to be taking a cue from LendingClub and is looking to boost new lenders, not just get existing lenders to invest more.  This promotion is on top of the still running 4% rebate on Featured Listings.  The new promotion is open to new lenders only, here is what you get:

Anyway you slice it, this is basically a “2% to 3% bonus” on your initial funds invested.  Assuming you would have bought the items in question anyway.

Prosper Promotion Ipad


Please note, I am a lender and of affiliate of both and LendingClub.  You can read about my experiences here.

Important: peer-2-peer lending involves risk and is anything but a “sure thing”.  Consider reading all of the following links before investing and be sure to only invest an amount that is appropriate for you:


Investing – Review of USAA Ultra Short Term Bond Fund (UUSTX)

My basic investing thesis is this: The stock market is a scam and interest rates are too low.  So what is an average retail investor such as myself to do?  I don’t want my money sitting around earning 0.01% in a money market fund and I don’t want everything locked up in certificates of deposits.  Stocks were cheap back in 2009, but seem way over valued now.

The answer I found was to invest some money in a short term bond fund.  If you are not familiar with how bonds work, it is important to know a few basic things:

  • A bond is basically a loan between someone with money and someone that wants it
  • Basic bonds need at least three things:
    • A specific amount borrowed (the “face value”)
    • A set maturity date, or for how long the money is borrowed
    • set interest rate (known as the “coupon rate”)
  • Generally speaking:
    • The longer the term of the bond the higher the interest rate
    • This is designed to compensate the lender for the risk of default and the risk of inflation
  • The value of a bond however can fluctuate over time as the markets perception of default risk and inflation risk changes

Knowing the above is useful, but the most important thing to know is that the price of an existing bond changes inversely to the rate of interest it pays.  That is to say, as interest rates go up, bond prices go down.  This is very important for investors in bond mutual funds and ETFs as the NAV or share value of the fund will go down as interest rates go up and vice-versa.

Since I believe interest rates will rise (or at least they should, if Ben Bernanke would stop kicking the can down the road and making things worse) I do not want to own long-dated bonds.  That is because these bonds will drop in value faster and further as rates go up than will short dated bonds.

Fund overview

In my search for a suitable investment, I started looking at short term bond funds.  The problem I had was that most funds that claim to be “short term” actually had average weighted maturities of 3 to 7 years.  That was way to long for my tastes.  Additional, the rate of interest they paid was in my opinion simply not high enough to offset the risk of future inflation or default risk.  Continuing my search, I came across a relatively new fund: The USAA Ultra Short-Term Bond Fund.

Why I like it

I like this fund for a few reasons:

  1. It’s USAA and they have always been an excellent company to deal with and I have never had a problem with anything they have sold me.

  2. The objectives of the fund align nicely with my outlook and goals:

    “Today’s low interest rate environment and concerns over possible future inflationary pressures have left investors searching for investment alternatives. Maximizing income and yield with share-price preservation remains a challenge for many investors. Therefore, in order to provide a solution for our members, we decided that now was an appropriate time to introduce the USAA Ultra Short-Term Bond Fund into our fund family lineup.”

  3. The fund will at least 80% of its assets in bonds with durations of 18-months or less

  4. During the new funds introductory period, it has a reduce management fee which is just 0.60%
  5. The performance is has been better than a savings account, with a year-to-date return of 1.27%


Risks to consider

Like all investments, this one includes risk.  The price of the fund could drop if interest rates rapidly.  The fund could also be mismanaged or have large defaults, both of which could reduce the share price.  Because the fund invests in short term bonds, the interest rate risk should be reduced.

Be sure to read the prospectus before investing.


Important Note: This fund is not FDIC Insured and is not Bank Issued, Guaranteed or Underwritten.  This fund may lose value.  Investing in securities products involves risk, including possible loss of principal.  As interest rates rise, existing bond prices fall.

Disclosure: I own this shares of this fund and contribute to it monthly via an automated savings plan.  Invest at your own risk.