Four Things I Learned in Phoenix

In the first week of December, the annual IMN Super Bowl of Indexing conference took place in Phoenix. I had the opportunity to speak at the event once again as an IMN ETF advisory board member. I also used the opportunity to take some time away from the conference and explore the Phoenix and Scottsdale area. Here are some of my observations from the conference and my trip to Phoenix.

Leveraged ETFs

Over the course of the last two years, I have spoken at several conferences and outlined the growing problems with leveraged and inverse-leveraged exchange-traded funds. I had a rather hotly contested conversation -- argument, perhaps -- with the attorneys who represented one of these leveraged promoters while participating in a Coral Gables, Fla., conference panel this year. I've written various articles on the subject of leveraged and inverse-leveraged ETFs, now archived on my Web sites, and contributors such as Eric Oberg have also written about the dangers of these products.

Our efforts have begun to pay off. Many brokers have taken the initiative to curtail trading in leveraged and inverse ETFs. On Dec. 1, Finra instituted new margin rules for leveraged ETFs. At the 2008 Super Bowl of Indexing, purveyors of leveraged and inverse ETFs were flouting their products and discussing aggressive plans for the future. Both ProShares and Direxion were sponsors or exhibitors at that event. At the 2009 event, Direxion, the firm whose three-times products were all the rage in 2008 was conspicuously absent. Remember, you can't spell Direxion without the word "dire."

An Afternoon at the Mall

As my luck would have it, the weather was cold and rainy. My wife and I decided to grab a late lunch with my broker and his wife at the Cheesecake Factory ( CAKE) in the Biltmore Fashion Park. I have dined at many Cheesecake Factory locations, and each and every time I had to wait close to or more to get a table. This time we walked right up to the reception desk and were seated immediately. Maybe it was the weather, or maybe the restaurant is less busy at lunch. Whatever the reason, I'm going to have to take a fresh look at Cheesecake Factory for my newsletter. Share price has risen smartly this year but could be ready to stall if the valuations prove too frothy.

The rest of the stores we passed by or entered were slow or even dead, including Saks ( SKS), Macy's ( M), Ann Taylor ( ANN) and Williams-Sonoma ( WSM). There was one glaring exception: Apple ( AAPL) was packed. Apple always seems to be packed; it is the quintessential exception over the last several years.

Real Estate

My wife and I went looking for a vacation/rental property in Scottsdale, keeping within the area code 85254. There wasn't as much inventory out there as I'd expected, based on what I've read and heard in the media. We saw nearly a dozen homes with three or more bedrooms and a pool. While all were in need of some work, the conditions were good enough to move in.

We found a house that we liked and discussed it on the way home, but by the time I was ready to put in an offer upon our return, the house was under contract. At the asking price. A friend of mine who's active in the market there said that the good deals aren't staying on the market very long. The market could be turning in one of the worst-hit real estate markets.

Indexing Is Not What It used to Be

The concept of indexing is quite simple: A manager builds and invests in a portfolio of stocks, referred to as an index, that attempts to replicate the entire market or a subset of the market. Many indices are widely disseminated through the media, and you are probably keenly aware of the more popular indexes such as the S&P 500, Russell 2000 and Dow Jones Industrials. But these are just the tip of the iceberg. Lesser-known indexes such as the Barclays Capital Aggregate Bond Index or the S&P Goldman Sachs Commodity Index are also important to portfolio and fund managers.

Indexing, while a complex concept, can create a very simple investing platform. In the past, it's been all about passive, rather than active, investing. One would select a targeted index and using statistical models try to replicate the returns of that index. Now, however, passive management concepts are being encroached upon by the world of active managers. Active managers are focused on and paid for outperforming an index. They do so by generating alpha returns. Indexing in its original form was typically all about managing and controlling beta, which is a stock or portfolio's measure of correlation to the market. A beta of 1 would be perfectly correlated to the market. Alpha, the risk-adjusted measure of active returns on an investment, is the return in excess of market returns.

What is troubling is that these products -- exchange-traded funds, modeling software, risk management tools -- are being designed to generate "guaranteed" alpha for the passive manager. There is a risk that such products could eventually blow up, just as the hunger for yield produced the credit crisis we endured during 2007 and 2008. This phenomenon is something that we should be keenly aware of and monitor as the asset management markets continue to evolve.

At the time of publication, Rothbort was long IWM, Apple and Goldman Sachs, although positions can change at any time.

Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site; and, publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.

Mr. Rothbort is a regular contributor to TheStreet.com's RealMoney Silver website and has frequently appeared as a professional guest on Bloomberg Radio, Bloomberg Television, Fox Business Network, CNBC Television, TheStreet.com TV and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.

Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.

Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.

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