Wednesday, October 31, 2012

Money Show - Larry Berman

Larry Berman is partner and chief investment officer of ETF Capital Management. His talk was called "How to use ETF's Like a Hedge Fund Manager".

He says we must understand who we are as an investor. How you think about investing is directly related to your income. We all have a fear reaction when we lose. The best people are only right 50 to 60% of the time. So, you got to expect to lose. The market is smarter than you. There is a probability to investing, but you should not trade just to trade.

Everyone thinks differently. Some people can stand risk and some cannot. The cycle of market emotions will be volatile. We should trade when we feel good about the trade and we should back off if a trade depresses us, but do not panic. Whether the stock market is going up or down, your questions is "Do I want to be in stocks now?"

Larry has a blog on BNN. See his blog on BNN.

Anatomy of Candlesticks -Traders footprints

Going long or short on the US market has a lot to do with the currency exchange rate. If the US$ is going up against the CDN, we buy S&P 500 SPDR (NYSE-SPY). If currency is moving the other way, we short the S&P 500 by buying ProShares Short S&P 500 ETF (NYSE-SH).

To do same thing on the Canadian market, longs are iShares S&P/TSX 60 Index Fund (TSX-XIU) or BMO S&P/TSX Capped Composite (TSX-ZCN) versus short of HBP S&P/TSX 60 Inverse ETF (TSX-HIX). The liquidity is better in XIU than ZCN.

To go long or short on Emerging Markets, use iShares MSCI Emerging Markets (NASDAQ-EEME), Vanguard MSCI Emerging Markets (NYSE-VWO) versus ProShares Short Emerging Markets E.T.F. (NYSE-EUM)

To get leverage on shorting the US market, use ProShares UltraShort S&P 500 E.T.F. (NYSE-SDS) or ProShares Ultra S&P 500 E.T.F. (NYSE-SSO). For leverage shorting of the Canadian market use HBP 60 Bear+ E.T.F. (TSX-HXD) or leverage going long on Canadian market use HBP 60 Bull+ E.T.F. (TSX-HXU).

To do leverage buying of Developed markets outside of the Canadian and US markets (i.e. Europe, Australasia, and Far East) use ProShares Ultra EAFE E.T.F. (NYSE-EFO) or leverage shorting use ProShares UltraShort EAFE E.T.F. (NYSE-EFU). For leverage buying of Emerging Markets use ProShares Ultra Emerging Markets E.T.F. (NYSE-EET) or for leverage shorting use the Emerging markets use ProShares UltraShort Emerging Market E.T.F. (NYSE-EEV).

All these ETFs are toxic to if held for the long term. You can also use ETFs that leverage times 3. These leverage ETFs can give you good moves during a day, but not any longer. Hold them no longer than a couple of weeks maximum, as they are high risk.

You can do a market neutral trade during a trading cycle. When discretionary stocks are rising in the trading cycle, buy 5 to 10 rising discretionary stocks and short SPDR Cons Discretionary E.T.F. (NYSE-XLY).

You can also do hedging with volatility risk by using iPath S&P 500 VIX Short-Term (NYSE-VXX). This is a short term holding and you should only use it if volatility is spiking and people are panicking.

For a full list of ProShares products see ProShares ETFs. For a full list of SPDRS products see their website. IShares products are listed here.

What is QE (Quantitative Easing)? The first point is that QE happens when the Fed buys bonds from the banks and gives them money. This will cause money to expand and it is also called injecting liquidity. This is the creation of electronic money. QE can be reversed by the Fed giving banks bonds and taking their cash. This is to contract the money supply.

Is QE working? The problem is that velocity of money is dropping. The velocity of money is at the lowest level since WWII. So QE is not working as the money supply is not expanding. Japan has been doing QEs for a long time and it has not worked. Japan really has no way out. They haven't been able to weaken their currency.

Also, Inflation can be sticky. It appears we have inflation because say a car purchase cost $30,000 5 years ago and same car is now selling for $35,000. However, today's car is much better and has a lot of new features. If you would have bought the exact same car without improvements, if might cost $28,000. So this is really not inflation, but deflation.

Japan is sinking, China is slowing, US has too much debt and Europe is worse. Two areas of interest are dividends and gold. You can buy iShares DJ CDN Dividend E.T.F. (TSX-XDV) or iShares Gold Bullion Fund (TSX-CGL). Dividends and gold are the only exciting areas today.

Warren Buffet is holding some $41M in cash. If you have a portfolio of 50% stocks and 50% bonds, the average return is 8%. However, to get this average return you need 40 years.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.


  1. It appears from the chart to be a stand off between the bulls and the bears.

  2. Do not invest with Larry Berman or anyone who sells from his company ETF capital Management. Performance is way below benchmarks consistently. I invested and was never above water so I recently pulled out. Take my advise and stay away!