Just what linkage is there between Carlos Slim Helu being selected as the richest man on earth by Forbes, and the outlook for his native Mexico? In my view, nada.

To be sure Matthew Miller, the senior editor of the magazine who does the billionaire tables thinks otherwise. But he would, wouldn't he?

Back in the Dark Ages when I started Global Investing we recommended TelMex, Slim's flagship company, until one day via a financial analyst publication I received a devastating report from a CFA about how TMX accounted for clients and churn.

The author had been blocked from putting out his views by the investment bank he worked for. They had a relationship with Slim's company (who didn't?) Mr. Slim was a friend of the then-president of Mexico and had benefitted mightily from special deals on telephone and TV licenses.

My source passed his analysis on condition of anonymity. And we dropped TMX from the Model Portfolio. And the whole world of Mexico analysts tried to find out who had done the deed. My lips were sealed.

For whatever it worth, as Mr. Slim won the gold ring by beating Bill Gates by the mere bagatelle of $500 mn in wealth, Mexico is seeking $48 bn in rollover credits from the International Monetary Fund. Same order of size.

A reader of the pre-subscription newsletter named Kim K. wrote to me yesterday, I think from Canada:

I think that the reader who was talking about playing roulette was right. You have about 60-70 stocks in your portfolios. An average investor cannot hold that many stocks, he has to pick maximum of 20-25. So there is a lot of luck involved to pick the “good” ones.

It is a well know [sic] fact that with 20-25 stocks, the total risk of the portfolio is reduced by 70 percent. Further increase in the number of stocks does not produce any significant further risk reduction.

The most successful newsletter in the last 5 years, [Cabot] China & Emerging Markets (average annualized return of 21.4% in the last 5 years, including the 23% loss in 2008) holds up to 10 stocks.

Even with only 10 stocks you can do very well including only 23% loss in 2008. Holding 60-70 stocks is impractical for most individual investors. Once you need to pick and choose, it’s no more than roulette. We both know that 80% of your performance is contributed by 20% of the stocks (20/80 principle works here, like in other areas in life). If I have a portfolio of 20-25 stocks and I want to allocate 40-50% to global stocks, I can pick and choose only 10-12 of your stocks. What are the chances that I would pick those 20% big winners? No more than pure gambling.

Vivian replied:

I think you are misrepresenting the pile. There are in fact 4 portfolios one for beginners made up of closed end and exchange traded funds for instant diversification; then a yield portfolio for the over 40s who need stability and which people add more of as they get older and older; then buy and hold which is the basic portfolio; and then speculations which are just that.

They have different risk so they also produce different gains. In fact last year the buy and hold outperformed the speculative which is odd but we were in a major market recovery.

As for my ability to tell you which 10 or 20 stocks will produce the bang-up winners, sorry, but my crystal ball is clouded. We never add a new share without selling something to make room. I never say "EVERYONE BUY THIS STOCK NOW!"

If you want a momentum-driven newsletter, buy it. I am not buying China and Emerging Markets without the rest of the globe. You compare our Hulbert performance with the CEM one. Okay, go to China and emerging markets and invest all your money there and good luck to you.

Diversification does not mean buying 10 stocks in China and emerging markets while ignoring the rest of the world outside the USA. The Chinese growth story has been wonderful and we benefitted from it handsomely, but I would not put all my money, or half my money, or even 10% of my money into Chinese shares. Nor should you. Nor even would Fei Chen who writes about China for us.

Nor having watched the Chinese Great Internet Wall in action would I ever buy Baidu, one of the top Cabot performers just on ethical grounds. Running a newsletter makes me part of the press, and when in China I do not want my access to the world cut by the authorities as it was during my 3 weeks in China two years ago.

China and emerging markets alone make up a concentrated high-risk approach to global investing. And past performance is not predictive of future results, as the SEC keeps making funds tell people.

So if you were to ask my advice, which you didn't, I would say that you should balance those ten emerging markets plays with probably another 30 positions in developed country and yield stocks.

I have been editing global investing for 20 years and if I had been doing a single best idea each issue I would no longer be in business. And I and my readers would be much poorer.

Another reader commented on my rule that we sell to buy something else that it was just like his tie collection. He gets rid of an old tie before he will wear a new one. More for paid subscribers from Canada and Britain and China below starting with China. Read more »

Today is the first anniversary of the bottom of the global stock markets on March 9, 2009. Here is what I wrote that day:

The main optimistic view is that because the U.S. was first into the mess, it will be first out. FIFO in fact.

Since we never have been in a comparable economic downturn in my lifetime, I hesitate to make predictions. But I am sure of one thing: the stock market will not sink to zero. And the U.S. will come back.

I then segued into a recommendation to buy GE which many readers teased me about forever after.

Today's newsletter is short because I am going to a lunchtime concert. But we have news from Germany, Israel, Britain, Canada, and Brazil.

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Today's newsletter is a new departure. We run for paid subscribers a pair of article by... paid subscribers, each about his or her favorite stock in the Global Investing universe which we have not written about yet.

This violates one of our rules. Normally Vivian and the editorial team do not buy the shares we write about before the issue has gone out. On the other hand, both of these long-term readers are not managing money for anyone but themselves. Naturally I took the liberty of making editorial comments.

The companies our paid subscribers wrote up come from India and Britain. Read more »

Right of response was granted to Tom McClellan who emailed about my charts note yesterday:

    "1. You misstated my assertions about the meaning of the eurodollar COT data. It shows an important top due in mid-March, and not an upswing at the end of March as you stated. Furthermore, you should already know that eurodollar futures don't have anything (directly) to do with FOREX. It is an interest rate instrument, not a currency instrument. They are not the same thing as euro currency futures as you implied. (VL: My error first on the timing, which I think is likely to be variable and vague with a new overlay; on the rest, please see below.) 

"2. You misidentified the name of my service. Mcoscillator.com is the domain name of my web site. The publication from which you were (incorrectly) paraphrasing is the Daily Edition of the McClellan Market Report. (VL: I was just trying to help those who want to learn more find you. It does. Sorry.)

"3. You hypothesized that charts only 'work' because of a self-fulfilling prophecy, i.e. people see what the chart says should
happen, and respond accordingly making it work. That is an interesting hypothesis, and it is also a testable one. All one needs to do is to look at stock price or other data from years when charts were not in common (or any) usage, and see if the "rules" of price behavior that one is interested worked back before people could know about them.
It turns out that chart analysis became popular between the 1930s and 1970s IN SPITE OF a multitude of assertions that it was akin to voodoo. I know people who got fired from banking jobs for being caught in possession of chart books. But over time, analysts realized that there was merit to technical analysis, and that realization continues to grow which is why the ranks of the Market Technicians Association are growing so quickly. People are finding out that the "school way" of analyzing the market does not work so well, and so they are migrating to things that do work.(VL: That is exactly my point. The degree of predictability will rise as the number of chartists does.)

"The bigotry against technical analysis is finally starting to die down because people are seeing for themselves that it works, just as the objections to black people being admitted to Harvard eventually died down when it was proven that they could do just as well as white students despite what the "experts" said. Sadly, such bigotry still exists in pockets, against both racial minorities and chartists. (VL: Okay Tom, take it easy. And the civil rights analogy is overstated, I think. W.E.B.DuBois was admitted to my old college in 1890-something.)

"Signed: Tom McClellan"

Vivian replies. Chartism is not proven by the fact that backtesting charts into the antedeluvian era before they were widely used seems to confirm the theory. True, when certain levels of pricing are breached upwards or downwards, the stocks rise or fall further. That is simply a reflection of human nature.

Momentum works because people like to buy a winner and sell a loser.A proof that you don't need charts for people to subconsciously use them is shown by how stocks which have split 2:1 tend double to prior levels more quickly than stocks which did not split. Investors have a recollection of what price a share commands and this pushes split stocks up.

As for the link Tom alleges between the eurodollar rate and the stock market, this really is voodoo. The eurodollar rate serves a bunch of functions besides being a way for foreigners to buy dollars (which despite what Tom wrote, has foreign exchange implications.) Offshore buyers buy offshore unregulated dollars because they get a better yield thanks to the absence of Fed reserve requirements and other regulations applying to normal dollars here.

Then too check accounts for corporations "sweep" surplus money into eurodollars because yields are higher. You set this up with your bank or have a smart CFO do this, but it only pays off for megabucks.

The eurodollar market is also used, as Tom notes, to lock in yields for large players planning to borrow or lend later. This is a pure interest rate measure although because the eurodollar pays out interest in advance and is leveraged, it is also a cool way to do interest rate speculation.

And finally the eurodollar is part of the TED spread, a way to benefit from market complacency or panic by buying T-bills and selling eurodollars, or the reverse. If there is panic, deposits flow to T-bills. T-bills pay less than eurodollars but are perceived as safer and then in demand. This pushes their yields even lower so eurodollar yield spreads become more profitable. In periods of calm, more funds go into eurodollars for the extra yield, and the spread in prices shrinks.

A supposed link between this large market in offshore dollars and any S&P movement is voodoo (despite Tom McClellan's charts). The reason: I cannot figure out how the two markets are linked in the real world. While we can't quantify it, we know pumping more carbon into the atmosphere increases global temperatures. I can see why a huge shift in tectonic plates off the west coast of Chile can wiggle the earth's axis a few mini-seconds from the prior balance.

But apart from the chart itself, I cannot explain why the eurodollar price 14 months ago will affect the stock market this month.

We reported (mistakenly along with everyone else) that China had cut its purchases of US T-bills in Dec. In fact, the latest wizard analysis says China is buying as much US debt as before, channelled via London and Hong Kong. Fund flow analysis is not easily grasped and even charts miss stuff.

Value destruction via mergers continues. The latest victim is AmBev which we sold over concern over its gulping down Anheuser Busch. It missed its targets for Q4 (except in the old InBev pre-merger heartland of Brazil) and forecast further sales erosion. Cheers.

While the Euro (not the same crittur as the eurodollar) fell today on news than Angela Merkel does not want German ants to help fund profligate Greek grasshoppers, Greece in fact is moving toward a 10-yr bond issue. It will be at something like 310 basis points over the euro mid-swap level (down nicely from the 365 bp spoken of a week ago.) The amount is uncertain, around euros 5 bn to 10 bn, so there will be more issues. This one will pay on my birthday, June 19, and run to 2020. Any reader wanting to buy me a chunk should accept that the value of the euro may even go up over the next decade as tightening comes, however belatedly, to euroland. So the payoff to me will be even higher. By 2020 I will have retired in any case and I will show my gratitude by consulting for the donor.

*More for paid subscribers follows from Israel, Australia, Germany, Chile, Switzerland, and Lincolnville.

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