It’s no secret that new ETFs are being brought to the market as fast as sponsors can obtain regulatory approvals. I have touched on this before that having all these investment choices available does not mean you should jump on the band wagon and buy any new offering.

MarketWatch had a piece on the pitfalls and potential problems when investing in markets that are thinly traded. For one, if an ETF has trouble attracting enough inventors, you can be sure that the expense ratio will be higher. Additionally, the bid-ask spread may widen to a point where liquidating a position may turn a profit into a loss.

I for one will stick to using only well traded ETFs with heavy volume so that liquidating a large position won’t be a problem when the markets head back south eventually.

As I mentioned in my weekly updates, there always seem to be a variety of ever changing factors that have driven this market to its current highs. One, we have not touched on, is the increasing debt big and small investors are using to leverage their investments.

The WSJ reported that margin debt, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.

For obvious reasons, I’m personally not in favor of using leverage to increase returns. However, this risky technique has enabled many large players (hedge funds) to leverage their buying power by not just acquiring more stocks but also swallowing up entire companies. This is simply an indication that rampant speculation is alive and well.

To make it easier to borrow money and reduce the chances of a margin call, the NYSE launched a pilot program with eight brokerage firms that allows them to assess the portfolio as a whole. So, if one part of the portfolio goes down but the other part goes up, the investor won’t necessarily get a margin call.

Under the financial industry’s old rules, investors who wanted both to buy shares in a company and use so-called options contracts on that stock, to guard against an unexpected drop in the value of those shares, would have to put up separate collateral for both the stock and the option. If the shares dropped in value, the customer might get a margin call, or request for additional collateral from a broker, to cover the price of the shares, even if the value of the option had increased.

With any type of leverage, a normal market correction can easily turn into disaster if many investors have to cover margin calls, which will accelerate selling and worsen the downside effect. The longer this goes on, the worse the eventual outcome.

That’s why you continuously hear me harping on the importance of following a sell stop discipline. When the market trend reverses, leverage will be a killer, while at the same time the exit doors will get very crowded.

Last week’s solid rebound rally happened despite higher oil prices and interest rates. Generally speaking, interest rates and stocks tend to move in tandem, which has not been the case lately. Take a look at the chart below, which shows the iShares Lehman 20+ Year Treasury Bond ETF (TLT), vs. the S&P; 500:



Notice that the gap between the two has been widening since the end of 2006, which means that, as interest rates rose, bond prices fell. Long-term, this is not sustainable as stock investors at a certain point will switch to higher yielding and safer bonds (as in ‘perceived’ safety) from the more volatile stock market environment.

While there is no exact number in regards to a desirable bond yield for investors to make the switch, my point is that an adjustment will happen; the timing is just unknown. That can either be in the form of lower interest rates (good for stocks) or lower stock prices (higher interest rates), the former which would be more desirable.

The good news is that, when using trend tracking, we don’t have to concern ourselves with the “when” and “why” since our exit strategy will tell us when it’s time to take some chips of the table.

With Standard & Poor’s recent downgrading of some of the subprime loans, this question comes to mind: Will continued problems in that area, like more downgrades or defaults, have a negative effect on stocks and subsequently mutual funds and ETFs?

MarketWatch had a story on that subject, which made the case for a potential spillover into stocks. I have to agree with it, but the timing is very uncertain. Once Wall Street traders focus more attention away from the lucrative M&A; business and get done with evaluating the earnings season in the next couple of weeks, they may just look for other things to dwell on.

Subprime problems certainly might take center stage especially if the downgrading continues. I liked Peter Schiff’s (Euro Pacific Capital) quote best when he said in regards to subprime loans that “if lenders themselves call them liar loans, why should we think they’re boy scouts?”

This debacle is far from being over, and it pays to have a strategy should the stock market become the whipping boy of the subprime fall out. Depending on the severity of the outcome, it can certainly derail this enthusiastic rally in a hurry; however, those with clearly defined exit strategies may be in a position to avoid serious portfolio damage.

Even the WSJ recently touched on one of my pet peeves I wrote about recently as I was reviewing the book “Why Business People Speak Like Idiots.”

Their article was named “Most Annoying Business Expressions” and covered some of the blown up phrases that could be translated into a simple word for everyone to understand. Here are some of the highlights:

Paradigm shift. The most overblown euphemism for “change.”

Swung to a profit/loss. A staple of Wall Street Journal earnings stories, it conjures images of Tarzan as an accountant.

Downsize (or its variations including “right sized” or “reductions in force”). They’re being fired, folks.

Sell off. There is no selling without buying

Leaving for personal reasons/to spend more time with his family. Yeah, right.

The pendulum has swung too far. I’m not a physicist, but pendulums by definition can’t swing too far.

We are cooperating fully with the investigation. After which our CEO will be leaving to spend more time with his family.

Profit taking. It’s called selling.

Merger of equals. The business version of jumbo shrimp.

Forward-looking statements. Lawyers must get paid by the word. For the rest of us “forecast” or “prediction” works just fine.

Reviewing our strategic alternatives. It’s called selling.

Quiet period. A legal fiction that grew out of a rule prohibiting companies from hyping their stock before selling shares to the public.

Pre-owned. A mangling of the English language to avoid the truth: used.

Pre-approved. A mangling of the English language to hide how lenders see you: a sucker.

Zero-percent financing/interest. How about “no interest?”

The customer experience. I don’t want to have an experience. I just want to buy stuff and leave.

Maximize shareholder value. Companies that talk about it usually aren’t doing it.

There you have it. If you have some to add, feel free to send them to me. Don’t keep those gems to yourself.

In a previous post I mentioned the obvious disconnect that occurred earlier this year between domestic REITs and those that invest in the global arena.

The WSJ just featured an article called “Foreign Real Estate Funds Boom,” which analyses several REITs covering a variety of countries. Most of them are well known, however, foreign funds are not the cheapest when it comes to annual operating expenses.

However, my contention has always been that cost is relative to performance. If you had owned EGLRX for example with an over 40% return over the past year, the expense ratio would not have mattered. Nevertheless, many investors prefer a low cost solution along with great performance.

As has been the case, ETFs have come to the rescue over the past 5 years. The new kid on the block for international REITs is a Wisdom Tree International Fund (DRW), which focuses on Australia and some Asian countries. It’s only been around a short while, but for that period it has closely tracked the above mentioned EGLRX.

I will add DRW to the StatSheet (sector section and master List) starting with this week’s issue. While there is not enough data available to clearly identify its long-term trend, having it included already gives us the opportunity to monitor it and see how the momentum figures develop over the next few months.

If you believe that the performance of foreign REITs is to continue, you can invest in this new ETF now, but it is essential that you use my recommended sell stop discipline, just in case the market turns against you.

I have currently no investments in these funds.