The ease of adapting Drach’s methods to closed-end funds is based on the similarity of scanning for relative discounting. The essence of the timing technique is to attempt to expand common stock investment when the overall market is relatively low, confining investment interest to stocks that qualify for the Master List, which appear relatively discounted to the others.
Scanning for the most appropriate closed-end fund based on discounts has the same objective: isolating the cheapest. In Drach’s objectives, he is searching for specific stocks that are overly discounted. In Herzfeld’s closed-end fund analysis, he is searching for the most discounted fund. The focus of both techniques is to isolate excessive discounts relative to historical/statistical norms.
A significant differential between Drach’s concentration on specific stock and Herzfeld’s concentration on specific funds is that the funds, by their structure, involve diversity in the number of different positions. Read the rest of this entry »
In both the primary and many of the ancillary criteria that determine buy/sell signals, interest rate projections play an important role. Whenstocks are priced at reasonable or discounted levels relative to historical fundamental norms, lowering interest rates can have a strong positive effect. Conversely, especially when stocks are overvalued relative to fundamentals, higher interest rates can be shown to have a very negative effecton stock pricing.
The effect on bonds (and bond funds) resulting from interest rate changes are more straightforward than stock pricing relationships because the effect on stocks at any given time depends on stock price levels. The effect on bonds is direct: Lower rates create higher bond prices, and higher rates result in lower bond prices. The effect of rate changes on bond prices can be more dramatic than many investors realize, with the greater price shifts associated with longer maturities. Read the rest of this entry »
An interest-rate agreement is an agreement between two parties whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate, called the reference rate, is different from a predetermined level. When one party agrees to pay the other when the reference rate exceeds a predetermined level, the agreement is referred to as an interest-rate cap or ceiling. The agreement is referred to as an interest-rate floor when one party agrees to pay the other when the reference rate falls below a predetermined level. The predetermined interest-rate level is called the strike rate.
The terms of an interest-rate agreement include
- The reference rate
- The strike rate that sets the ceiling or floor
- The length of the agreement
- The frequency of settlement
- The notional principal amount
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Buying foreign stocks is cumbersome for an individual investor because it requires currency conversion, opening an account with a foreign broker, taking custody of a foreign company’s shares, and all the associated transactions. Many domestic brokers now offer trading in foreign stocks, but it is still a lot more difficult to buy and sell foreign stocks than it is to trade domestic stocks.
There are, however, alternatives available that do not require direct trading on foreign stock exchanges. These are American depository receipts (ADRs), mutual funds, exchange-traded funds, and multinational companies. Details are provided below.
ADRs are negotiable registered certificates that stand in for the underlying stock of foreign companies. A U.S. bank (called a custodian bank) holds shares of foreign companies and issues receipts (ADRs) against those shares. There could be one ADR for several shares or several ADRs for one share of stock—the custodian bank picks a ratio that puts the ADR in a tradable range of $50-100. For example, each share of British Petroleum is subdivided into six ADRs and each share of British Airways is equal to ten ADRs, while two Honda shares make one ADR but one Sony share is equal to one ADR. Read the rest of this entry »
