Highlights and Commentary
By Roy Weitz
(Originally posted November 1, 2006)
[Archive Table of Contents]

Roy's Excellent Market-Timing Adventure: The End

October 16, 2006 marked the end of my one-year market-timing experiment, using the Intelli-Timer trading system.....Throughout the final (short) month, the system had me on the "long" side of the market, which is where I had been since June 29.....My return for the final month was +4.10%, and that was just enough to push my return-since-inception into positive territory (+1.90%).....In dollar terms, I started the experiment on October 17, 2005 with exactly $5,000, and ended the year with $5,095 and change, as you can see from the chart below:

For the full background and history of this adventure, click here
MonthDate of
signal
(1) 		Type of
signal		Fund
bought/held
(2)		Acct value
(beginning)		Acct value
(ending)
(3), (4) 		Change in
acct value
for month		Change in
acct value
since inception
October, 200510/16LongOTPIX$5,000.00$5,080.09 +1.60%+1.60%
November, 2005No new signalLong still in effectOTPIX$5,080.09$5,484.89+7.97%+9.70%
December, 200511/29ShortSOPIX$5,484.89$5,381.32-1.89%+7.63%
January, 2006No new signalShort still in effectSOPIX$5,381.32$5,378.51-0.05%+7.57%
February, 20061/29LongOTPIX$5,378.51$5,186.30-3.57%+3.73%
March, 2006No new signalLong still in effectOTPIX$5,186.30$5,193.62+0.14%+3.87%
April, 2006No new signalLong still in effectOTPIX$5,193.62$5,257.84+1.24%+5.16%
May, 2006May 16/
May 25		Cash/
Long		OTPIX$5,257.84$4,938.37-6.08%-1.23%
June, 2006June 12CashNA
(Cash)		$4,938.37$4,659.14-5.65%-6.82%
July, 2006June 29LongOTPIX$4,659.14$4,395.56-5.66%-12.09%
August, 2006No new signalLong still in effectOTPIX$4,395.56$4,602.20+4.70%-7.96%
September, 2006No new signalLong still in effectOTPIX$4,602.20$4,894.62+6.35%-2.11%
Thru October 16, 2006No new signalLong still in effectOTPIX$4,894.62$5,095.09+4.10%1.90%
Notes:
(1) Signal was executed (i.e., fund bought) on the next business day.
(2) OTPIX=ProFunds OTC Inv.; SOPIX=ProFunds Short OTC Inv.
(3) Unless otherwise indicated, cut-off for valuation and account activity is 26th day of the respective month.
(4) Account value includes value of fund shares only. Cash in the account, as well as interest earned on the cash, is ignored. Brokerage commissions are paid out of this free cash, and commissions are not included in return calculations. Dividends are reinvested.


Offsetting my $95 profit, above, was a total of $119 in trading costs, so I actually incurred a cash loss for the year of about $24 (I made seven trades at $17 each through Scottrade; however, with an account of $15,000 or more, I would have been able to trade at no cost directly through ProFunds).....Also, as I indicated at the outset of the experiment, Intelli-Timer allowed me free use of its service.....Had I been a paying customer, a "personal" subscription to the Intelli-Timer system would have set me back $366 for the year, while a "professional" subscription, at current rates, would have cost me a whopping (ridiculous?) $2,000.

No investment exists in a vacuum, which is why every investment and investment strategy should be evaluated in comparison to other potential uses of the money.....Throughout this experiment, I've been comparing my Intelli-Timer account to the five benchmark mutual funds used in FundAlarm every month, and this is where the Intelli-Timer system has really suffered, as you can see below:

Final month
(9/27 thru 10/16)		Since inception
(10/17/05)		$5,000 at inception
would have
grown to:
Schwab International Index Inv (SWINX) 3.12% 24.90% $6,245
Vanguard Small Cap Index (NAESX) 5.08% 19.97% $5,899
Vanguard 500 Index (VFINX) 2.49% 17.07% $5,854
Dreyfus Mid Cap Index (PESPX) 4.58% 16.39% $5,820
Vanguard Balanced Index (VBINX) 1.55% 11.35% $5,568
Roy's market-timing account 4.10% 1.90% $5,095
Sorted by return "Since inception"; benchmark returns assume that dividends are reinvested


In other words: Had I simply invested $5,000 in FundAlarm's worst-performing benchmark over the past year (Vanguard Balanced), I would have had $5,568 in my account at the end of the experiment, with no additional trading costs or subscription fees to worry about.....At the other end of the performance spectrum, had I invested my $5,000 in Schwab International Index, my account would have grown to $6,245.....Recently, I've been putting almost all of my new equity money into Vanguard Total Market Index (VTI), an exchange-traded fund, and that's almost certainly where I would have invested the Intelli-Timer money had I decided not to conduct this experiment.....In the year since October 2005, a $5,000 investment in VTI would have grown to about $5,850, so that's what I figure Intelli-Timer has really cost me: About $755, or 15%, in lost return ("opportunity cost"), plus trading costs of $119.

When I started this experiment last year, I said the following:

Those of you who've followed FundAlarm for a while know that I've always been a boring, buy-and-hold investor.....I've never been a market timer and, in fact, I've always been deeply suspicious of market-timing schemes.....I remain deeply suspicious of market-timing, but I thought it might be interesting (and, perhaps, instructive) to get some personal experience with a real-world market timing program .....For example, I'd like to know if it's really possible to follow market-timing signals over the course of a year, exactly as they're given by the program sponsor.....Since I'm going to be playing with real money, I'd also like to know how it feels to be ordered in and out of the market by a black box, which I neither understand nor (as of now) have much confidence in.....Finally, and perhaps most importantly, I'd like to know if my gross return for the year matches up with advertised returns for the program, and I'd also like to understand the effect of real-world transaction costs and taxes on published returns.

The Intelli-Timer trading signals came by e-mail, the night before they were supposed to be executed, and I had no trouble executing all of the signals.....I didn't understand the Intelli-Timer system when I started with the program and, to this day, I still don't understand how or why they develop their signals.....The Intelli-Timer Web site takes a few stabs at explaining the system, and Intelli-Timer's weekly e-mail updates would occasionally explain the most recent signal, but I found these efforts to be pretty much incomprehensible.....Intelli-Timer is in a difficult position, because saying too much about its system might enable someone to copy or reverse-engineer it (not much of a concern these days), while saying too little leads to my problem: I never had confidence in the system, especially during the rocky months of May, June, and July.....If I ever participate in another market-timing program -- unlikely -- I would insist on understanding, in detail, how the system works.....And if the sponsor of the system refused to explain how it works, or I didn't understand the explanation, I simply wouldn't invest my money.....As for comparing my investment results to Intelli-Timer's advertised results, the jury is still out.....The performance section of the Intelli-Timer Web site hasn't been updated since January 30, 2006, undoubtedly because 2006 has been such an abysmal year.....But as we move into 2007, it seems that Intelli-Timer will have to either update its results for 2006 or pull the plug on its system, so I'll keep checking and report back here.....After a year like 2006 I don't know how Intelli-Timer can continue to sell its program, but I have a feeling they're going to try.

If there's a final word on my experiment, here it is: Had I simply invested $5,000 on the long side of the Intelli-Timer strategy (i.e., ProFunds OTC Investor, or OTPIX), and held that position for 365 days, I would have ended up with $5,524 in my account, for a gain of +10.47%.....Which means that all the signals, all the trading, all the expense, and all the fuss of the Intelli-Timer system actually subtracted value from a simple buy-and-hold strategy.......That's a tough marketing hole to talk your way out of.


Crooked Al's Kickback Scheme of the Month

Last month I told you how to set up kickbacks in the construction industry, and the month before that I gave you the skinny on how to work with "friendly" politicians. This month, we're gonna talk about kickbacks in the mutual fund industry.

OK, so here's the deal. Say you're in charge of the company that manages a small mutual fund, and you know that you gotta hire some outside service providers to keep the fund running, to do stuff like record keeping and updating your prospectus. All of these services are totally legit fund expenses, and that means the Feds will allow you to use the money in your funds to pay for them. So far, pretty boring, but now it starts to get good. Let's say that you, as the head of the fund company, recommend to the directors of your fund that they hire some outfit called BISYS to provide a bunch of services to your funds. The directors, they're as dumb as bricks, so they say yes, and they agree to a contract with BISYS for $150,000 a year, which is what you told them it was gonna cost. Now you're a pretty sharp operator, so as soon as that contract is signed you go to BISYS and you make them an offer they can't refuse: "Hey, BISYS," you say, "I know it costs you only about $40,000 a year to actually provide these services to my fund, and the only reason my directors agreed to pay you $150,000 is because they're dumb as bricks. So what do you say, BISYS, that you keep the $40,000 a year that it actually costs you, and you kick back $110,000 to my fund company. I won't tell my fund directors anything about this, and everyone will be happy." Fund owners, I'm telling you, you gotta try this! That poor money in your fund is just crying out "Steal me! Steal me!" and you gotta do what it wants. This scheme is sweet, and you ain't never gonna go to the slammer, because it's mutual funds. Try it today, and thank Crooked Al tomorrow!


Well, Crooked Al is a little late to the party, but basically he has the right idea.....From 1999 to 2004, mutual fund service provider BISYS did agree to participate in kickback schemes with 27 fund company operators.....BISYS is now out of the kickback business, thanks to a recent $20+ million settlement with the SEC, and the Feds have turned their attention to the other side of those kickback arrangements......It looks like some or all of the 27 fund companies, as yet unnamed, intentionally overpaid BISYS for fund services using fund assets.....The fund companies then demanded that BISYS kick back a portion of its fee to pay for services that would benefit only the fund management company (mostly marketing expenses, but other things as well, such as country club dues)......This is flat-out theft of fund assets, and should be punished with jail time......Of course, it won't be.....Fund directors appear to have been kept out of the kickback loop, but with a little bit of initiative and effort the directors probably could have have figured out that their funds were being ripped off.....Let's call that water under the bridge.....Now, every director at every mutual fund involved in the BISYS kickback scandal should demand (1) that the fund management company acknowledge its involvement, and (2) immediately reimburse fund shareholders for fund assets that have been misappropriated.....Any fund company that doesn't come clean immediately should be fired by the fund's directors (OK, it might be a little more complicated than that, because some of the fund directors who were supposedly kept in the dark might have been related to BISYS. But we can dream, can't we?)......And what about any fund directors who don't stand up for fund shareholders at this important time?.....They should be fired, too, and the only way shareholders can do that is to sell their fund shares......This story will be around for a while, so stay tuned.


The list that follows shows some of the "gold mining" investments recently owned by U.S. Global Investors Gold Shares fund.....See if anything jumps out at you:


Source: U.S. Global Investors Gold Shares shareholder report, June 30, 2006


We've helped a bit, by underlining the word "warrants," but you probably would have noticed this on your own: U.S. Global Gold Shares (USERX) really likes warrants.....(A warrant is a kind of option that gives the holder the right to buy shares of a company's stock at a predetermined price. Like other options, warrants are traded on the securities markets, and they are leveraged investments that could result in a total loss. For example, if XYZ stock were increasing in value, XYZ warrants ordinarily would increase in value considerably more. If XYZ stock were declining, the leverage would work in reverse, and XYZ warrants would drop even faster. If XYZ stock never achieves its target price, the warrants will eventually expire with no value).....At the end of 2005, USERX had about 30% of its total assets in warrants -- far more than the typical gold or precious metals fund (as of June 2006, warrants had dropped to a still-high 19% of the portfolio) .....Despite this fondness for warrants, USERX investors have pretty much been left in the dark about this important fund strategy: The word "warrant" doesn't appear even once in the USERX prospectus, or on the U.S. Global Web site, or in the most recent shareholder report (except as part of the mandatory asset listing, above)*.....Why would U.S. Global seemingly go out of its way to avoid talking about warrants?.....We're guessing here, since we wanted to talk with the U.S. Global folks and they didn't respond to our e-mail inquiry.....Ultimately, we suspect, it all comes down to marketing: In the recent bull market for gold funds, outsized warrant positions gave USERX an extra boost that helped push the fund to the top of the gold-fund category......And when you're a fund manager, good performance looks even better if you don't have to disclose all the extra risk that you took to get there.
* "A Strategy Warranting Attention," Tom Lauricella, The Wall Street Journal, September 29, 2006


You win some, you lose some: Back in October 2000, a couple of Heartland muni bond funds suffered a sudden and massive drop in value.....Those funds are long gone, several related court cases also have come and gone, but at least one case lingered on until a couple of months ago: The SEC was trying to prove that Heartland CEO Bill Nasgovitz, and a Heartland investor named Raymond Krueger, had engaged in insider trading (the SEC alleged that Krueger had lunch with Nasgovitz about a month before the fund devaluations, then took a "tour" of the new Heartland offices and immediately sold his remaining Heartland muni fund shares based on information that Nasgovitz had shared with him).....The federal judge in charge not only tossed out the case, he also gave the SEC a serious dissing:

"By putting the word 'tour' in quotes, the SEC indicates that Krueger used that word in his testimony – a misleading indication, at best. Perhaps the SEC is not unlike Britney Spears in its inability to use quotation marks correctly. In her now-infamous interview with Matt Lauer, the erstwhile pop star said, 'I think 90 percent of the world agrees that the tabloids have kind of gone a little ‘far’ with me lately'...See also US Weekly Magazine...('As evidenced in her Dateline interview, [Britney Spears] has a knack for misusing air quotes, placing them in between words or around the wrong ones.')

Citing four other examples of sloppy legal argument and legal citation, the judge also suggested that the SEC lawyers review the rules of professional conduct that require an attorney "to be candid with the court"*.....Several of the SEC lawyers reportedly took the criticism quite well, while at least two of the lawyers are still unable to sit.
* Source: Forbes ("Informer"), William P. Barrett, October 16, 2006


It would have been cheaper to hire a proofreader: Back in June 2006, shareholders of Merrill Lynch funds were asked to allow BlackRock to take over as manager.....In August, the Merrill Lynch shareholders gave their OK, and that should have been the end of the story.....But wait: Sometime after the favorable August vote, someone at Merrill Lynch noticed that the "existing" and "proposed" fee schedules for two Merrill funds were shown incorrectly in the original proxy materials (the funds are Merrill Lynch Municipal Insured and Merrill Lynch National Municipal).....According to the original proxy materials, the management fee for each of these two funds was set to be reduced after BlackRock took over, while BlackRock actually intended to keep both management fees the same as they had been under Merrill Lynch.....Since the August shareholder vote arguably approved this unintended fee reduction, Merrill Lynch is conducting a new proxy vote that would authorize an increase in management fees to the level that was intended all along.....Got all that?.....Anyhow, the new proxy vote is going to cost about $236,000, none of which (according to Merrill Lynch) will be paid out of fund assets.


If you participate in the Savings Plus Program for California state employees, you should be aware of some recent changes.....The good news is that each of the funds in your plan now has a lower expense ratio (see the lighter-shaded areas below):


The not-so-good news is that, in every case except one (Growth Fund of America), the administrator of the plan has moved your money from a publicly-offered, open-end mutual fund to a separate account (again, see the lighter-shaded areas below):


The problem with a separate account is its lack of transparency, which is a fancy way of saying that you'll have much less information about what's happening to your money.....Under the previous plan structure, each fund had a ticker symbol, and there were literally dozens of places you could turn to for performance data, analysis, and commentary on your holdings, plus at least one place -- FundAlarm -- where you could turn for information about fund manager changes.....Under the new regime, all information about your separate accounts is going to come from one source: The administrator of the Savings Plus Program.....The administrator may do a great job keeping you informed about your retirement plan, or it may do a terrible job, but that isn't the point.....In exchange for the lower expense ratios, you've been required to give up something of value, namely, access to information about your funds.....You may view this as a reasonable trade-off, or not, but it's the kind of trade-off that often goes unnoticed......And even if you don't participate in California's Savings Plus Program, a change like this is news, because it could happen to your retirement plan at any time.
"What To Watch Out For With Fund Changes In Retirement Plans," Chuck Jaffe, Dow Jones Newswires, October 23, 2006


If we could all buy exchange-traded funds for free (i.e., no brokerage commissions), the mutual fund industry would be in serious trouble.....Which is why a recent announcement by Bank of America attracted so much attention: Starting in the Northeast, and going national soon, B of A customers with $25,000 or more in deposit accounts, and Internet access, will be able to make up to 30 free stock or ETF trades per month.....Fortunately for the mutual fund industry, this offer mostly turns out to be mostly hype.....First, the offer applies only to cash and cash-like accounts, so stocks, bonds, and mutual funds held through B of A won't count toward the $25,000 minimum.....Second, and more important, Bank of America generally offers non-competitive rates on its cash investments.....If you already have $25,000+ cash with B of A, and you're in the market for an ETF, you have nothing to lose by taking advantage of this new deal.....But it probably wouldn't make sense for someone to move that kind of money to B of A, just to take advantage of free ETF trading, because whatever might be saved on a few ETF trades would be lost in interest.....Sometime soon, some major online brokerage firm is going to offer a truly good deal for free ETF trading, other brokers will jump on the bandwagon, and the mutual fund industry will have a real fight on its hands.....The B of A offer is good for a headline or two, but it's not going to change anything.
* "What Does free Cost?", I.B. Artman, indexuniverse.com, October 13, 2006

[Update: Almost as soon as this issue was posted, FundAlarm reader Barry Barnitz pointed out that up to 40 free stock and ETF trades a month have been available since early October at zecco.com. The only requirement is a minimum $2,500 account balance. While zecco.com is hardly a major player, it will be interesting to see where this goes and what it leads to, if anything. Thanks to Barry, who runs the Financial Page blog, at http://financialpage.blogspot.com]


The Munder NetNet Fund rode the technology stock bubble all the way up.....Then, for about two-and-a-half years after the bubble burst (March 2000 through October 2002), Munder NetNet became one of the most impressive cash vaporizing machines in mutual fund history, as $11 billion under management became barely $1 billion.....Now the folks who run the Munder funds want investors to put aside their bad memories, make peace with their lost $10 billion, and take a fresh look at what Munder has to offer.....According to the current Munder CEO, John Adams, "Yes, there was a technology bubble. Yes, our funds did suffer from that"*.....Aficionados of inadequate contrition will want to pay particular attention to Mr. Adams' passive construction: Yes, our funds "did suffer from" the technology bubble.....Poor funds, it sounds like they were just sitting there, staying out of trouble, when some tough guy came along and forced the NetNet manager to buy hundreds of lousy companies that had no business plan, no earnings, and no prospects.....Better if Mr. Adams had simply said: "We screwed up big-time. We take full responsibility. Please take another look".....Perhaps best of all: Forget about Munder entirely.
* "Fund That May Be Unforgettable," Diya Gullapalli, The Wall Street Journal, October 3, 2006


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