All in all March was the worst month for tide directions in a year. The tidal date was usually marked by a short term move but was weak. The February 26 turn date was still inside the February momentum trend move. Only SPX and yen made credible turns, and even they still made lows on the next turn date of March 4 along with Tbonds and gold. By March 10-11 sustainable moves began up to the 19th when yen, bonds and gold began meaningful declines and SPX a minor decline. From the next turn date of March 27, possibly larger moves have begun. The price chart shows only the last ten trading days on a 24 hour basis. 24 hour ECBOT gold futures (ZB) moved to NYSE-LIFFE over the weekend with no data carry-forward, so that chart at the bottom is fractured in two.
For April I have 4/2, 4/8, 4/17, and the weekend of 4/26-27 as most probable tide turn dates.
April is the second most likely month of the year to show US stock market gains, with December the most likely. Often April gains will extend into May or even to July on occasion, this based on the Dow Jones 30 seasonal chart from 1928.
Two years ago I was making the major switch from an asset base primarily in equity/commodity/real estate assets to a base of income/commodity assets. The income part was to fund my current retirement budget. The commodity part was due to my belief that we had at least another decade of increasing price inflation and currency declines.
The first part of the switch was to get rid of almost all real estate, whether securitized as REITS or actual owned residential and commercial property. The latter was part of old family holdings it was time to sell for a number of reasons, and I was eager to do so before the economy slowed, as the FED was working on a cool off in 2005 and 2006. It took fifteen months from early 2006 into 2007 to unload the properties and a vacation home for all cash without retained notes. It took about five seconds to unload the REITS.
Income in the accounts then came from Vanguard Wellesley Income Fund (VFINX/VWIAX), Loomis Sayles Bond Fund (LSBDX), and increasingly from US and Canadian oil and gas trusts and partnerships up to about 15% of total. This appeared to be an unbeatable program and perhaps one for the very long term. But it was not to be. Although I anticipated a slow down and further inflation, I did not anticipate a world wide crash following a quick inflationary bubble in 2007 and early 2008. Nor did I appreciate how tightly bound the corporate bonds in VWIAX and LSBDX were to their corporate equity fortunes. As both of those funds began to deviate from very long term behaviors in early 2007, I began cutting them back and adding to money market funds which were then paying close to 5%. I didn't entirely get out of LSBDX early enough to avoid a 6% loss by June 2008, but as the losses later got to be over 30% annualized I felt much better.
I really expected the inflation bubble to subside somewhat from later 2006 into early 2008 as the FED tightened, but it did not. After gold hit its high in March 2008 I began exiting most of the commodity plays except for starting a position in the long/short Rydex Fund RYMFX run according to "Trader Vic" Sperandeo's futures strategy in physical, financial (notes, bonds) and currency futures. I sold about one half of my holdings in the oil and gas trusts. Physical gold wasn't sold then or now.
As money market rates began to topple and the whole world fell apart last year I switched a good bit of funds into the Vanguard short term municipal bond fund (VWSUX/VWSTX) for taxable accounts and into the Vanguard short term Federal Income fund (VSGBX/VSGDX) for tax-deferred funds. Short term Federal income means notes and bills of Treasury and GNMA, both guaranteed, and Fannie Mae and Freddie Mac, not guaranteed still but close to guaranteed in their government conservatorships. VSGDX's distribution yield was about 4.5% in much of 2008 and is about 3.5% now. It seemed about the safest play around as the storm raged. VWSUX was paying about 3.25% tax free then and about 2.5% now. Both funds were supplemented with small parcels of longer maturity/duration taxable (TIPS) or state tax-free bonds in the appripriate accounts.
Beginning in October 2008 around the time of the general crash I started buying back small pieces of the oil and gas trusts on sharp declines as I have previously explained. At the first of this year I switched mostly out of VSGDX and into VFIJX which is a pure GNMA fund with a fairly short duration but paying about 5%. VFIJX has a little more interest rate risk with a maturity/duration close to two years, but is still short term and with an AAA rating and larger payouts.
The oil and gas trusts are coming back, but of course their current total payouts are far smaller than last year since they depend directly upon current oil and gas prices received. So I have been looking at some ways to increase income portfolio yields. I have spent many hours getting up to speed on mortgage REITS (mREITS), as one possible alternative or supplement. As with real property REITS, mREITS pay no US or state income taxes as long as they follow very strict SEC and IRS rules. Thus they are taxed only at the recipient level and for tax-deferred accounts not until the money is withdrawn.
Basically the goal of a mREIT is to do what banks used to do, namely borrow money at lower short term rates to buy longer term higher yield mortgages. Since most mREITS buy only mortgages guaranteed by Freddie Mac, Fannie Mae, and or Ginnie Mae, their credit risk is low. This enables them to save on their borrowing costs. Of course they have a number of other risks. Primary among the other risks is yield curve risk. If short term rates rise more than long term rates the spread on which they make their money shrinks. So a steeper curve rising from low at the short end to higher at the long end is more favorable. Look at this dynamic chart of the yield curve from January 2001 to present to review the history of this highly variable factor in this century. There are other risks related to mortgage pre-payment dynamics (re-fi's) and the exact types and durations of mortgages (fixed, ARM, hybrids with resets, and caps and floors etc.). Some of this can be well or poorly hedged, or the risk can be accepted on a watchful basis.
Then note this chart of Annaly Capital Management, a veteran mREIT with prices and total annual dividends for each year. Clearly the yield curve you've just seen forecasts or follows closely the price of and mREIT.
The mREIT pays to borrow on its assets via repurchase agreements at a rate equal to LIBOR (London Interbank Offered Rate for dollars) plus a negotiated margin deposit, often referred to as the "haircut", and a negotiated premium over LIBOR. The repo is essentially a loan for a short period of time, typically 30 days to a year, to the mREIT by a bank or quasi-bank with the loan collateral being the mortgages owned by the mREIT. So one would want to look at a chart of LIBOR and recent financial reports to the SEC for the cost of funds for an mREIT, and at current 5-7 year mortgage rates. You probably would want to do that each week to keep track of the market environment for mREITS.
I said mREITS operate somewhat like traditional banks, and that includes leveraging their investment. Banks can leverage their deposits and other defined capital at many times the dollar value. mREITS pay more for their borrowed funds than banks typically do. so they tend not to leverage as greatly. I've read prospectuses and other publications for a number of mREITS and find that they tend to leverage from about five to ten times borrowed funds depending upon the market and various risk measures. So if a mREIT has $1 billion in capital from stock and/or bond issuance, they may borrow from $5-10 billion. They do this in phases. So instead of just buying the mortgages like, say, Vanguard GNMA Fund (VFIJX) does, they buy mortgages with their own original capital plus borrowed capital to increase the leverage.
Vanguard may make 5% or $50,000,000 on its hypothetical $1 billion portfolio. But an mREIT will make that much on its first $1 billion and then make five to ten times the spread between their cost of funds and 5% on the borrowed money. Let's say the spread is 2.5% for some given period and they borrowed $9 billion. The mREIT will make $275 million ($50 million on the first billion and $225 million on the borrowed $9 billion) or 5.5 times more than Vanguard! Hence the charm of mREITS, if all goes well. As we all know, everything doesn't always go well, and many organizations lost it all in the past 18 months doing this poorly. They went bust because they neglected normal rules of prudence or were simply ignorant. They bought private junk mortgages, now known as "toxic waste", rather than agency guaranteed mortgages. They over-leveraged and got margin calls on their repurchase agreements when repo rates went way up and the mortgages went down in price. And short sellers destroyed their capital structure and undermined repo terms even further. Things that "couldn't happen" did happen. Thornburg Mortgage is perhaps the best known of the mREITS to die, but many banks and hedge funds everywhere did precisely the same.
However, a lot of established and some new mREITS sailed through last year and this doing very well. Naturally a lot of them got sold off in stock price in the general carnage, but mREITS like Annaly (NLY), Hatteras (HTS), Capstead (CMO), Answorth (ANH), etc. all survived and grew since much of their competition for mortgages evaporated. Most mREITS are yielding between 10 and 20% right now, and might continue to do well as short term rates will likely stay low for some time to come. However, if credit crisis conditions resume, LIBOR+ repo rates at which they borrow could go up once more and trim the profit spreads for mREITS. Or repos terms might not even be rolled over. Or some lenders might go under as Lehman, a big repo lender did.
I have bought an initial parcel of NLY and will probably buy more. If I get to 1/3 NLY (and/or others) paying 12.5% and 2/3 in VFIJX paying 4.5%, my combined rate would be 7.167%, a sizeable overall increase. An increase in overall volatility and income would be the result unless I wanted to try to trade the mREIT cycle by monitoring the spread as mentioned above. This chart shows the relative volatilities of NLY, VFIJX/VFIIX and VSGBX/VSGBX. This is a price only chart without dividends. One would clearly prefer to be out of NLY during years like 2005 when the FED was in full tightening mode with short term rates going up a lot.
In retirement accounts where income generation was important, I started buying nine of these entities in 2006-2007. Six are pure U.S. oil and gas trusts: CRT, HGT, MTR, PBT, SBR, and SJT. I also bought DMLP which is run like a trust but also has a large land portfolio which it sells or arranges to have drilled. DMLP is a partnership but is totally unleveraged in the sense of having no debt, like the six U.S. trusts. Without any debt does not generate "unrelated business taxable income" (UBTI) and can therefore be held in a retirement fund.
TYG is a US aggregator of energy infra-structure MLP's--largely pipelines-- which chooses to be taxed as a corporation, and therefore can also be held in a retirement fund. TYG is leveraged about 40% with borrowed funds. COSWF is the U.S. "pink sheets" version of Canada's COS-UN.TO.
PBT was bought and sold several times as it is a good trader. The others were held until last summer when crude oil topped out. Some or all of the shares of each one were sold except for COSWF which was a small position. Then as the crash proceeded, I began buying small pieces back of all the stocks on very big down days, of which there were many.
The reasons why the trusts and the rest of these stocks crashed are varied. For one thing they do not have very large market capitalizations and except for PBT and HGT do not trade in large volume. So large orders can zap their prices. Many shares were held by hedge funds who could borrow at 1-2% and invest at 8-10%, so as they got margined out, they were forced to dump these shares as they were also forced to do so with a lot of closed end funds and preferred stocks. Mutual funds also owned a lot of these oil & gas entities to boost yields. As their mutual fund clients started selling fund shares they had to sell the trusts.
It really pays to "sell high and buy low" with these stocks. In all honesty I did not sell THE high nor buy THE low, but I have done pretty well under the circumstances. As the table shows, the average loss from their 53 week highs last year to their individual 52 week lows this year (except for TYG whose low was in November) was -73.6%. At the nearest to the high monthly or quarterly dividend payment date, they were paying an average of 10% annualized. Although I have not done the work, my recollection and feeling is that they paid about 7.5% last year on average. At the most recent dividend payment date they are paying 7.37% on average. *The large DMLP dividend is for January as they pay quarterly. DMLP haven't yet declared their April dividend, but I'm sure it will be far lower than 11.42% annualized.
Thus the dividend payment rates are not all that different from what they were at the highs. Obviously the prices and total dividends paid are much lower, but the rates show that the stocks are fairly priced at this time. They have bounced back 45.3% from their lows, but it is only fair to back out TYG which has risen 174%. When that is done the other eight average being up ~29% from the lows.
For new investors these stocks are throwing off good dividends at current prices. Except for TYG they have no debt and very little overhead, in some cases only a clerk to receive royalty payments and to disperse them with legal and accounting oversight. So if one believes, as I do, that oil and gas prices will rise again, they may give both capital gains and increased dividends.
One good place to read about these stocks is in Kurt Wulff's website. He has nice things to say about them all (except TYG which he does not follow) this week in his delayed free letter of March 15. FinanceYahoo is also an excellent source of information of all kinds, as usual, especially for price and dividend history.
My approach has been to establish an approximately equal set dollar amount for each of these stocks and sell back to that level when they rise 25% in price, and then buy back up to that price if they decline 25% from the set price. This very mechanical method helps keep emotion out of it and has worked quite well. With brokerage commissions so low today, it's feasible to do this without spending very much.
The stocks are a good way to add income during this time of very low rates generally, and they are an inflation hedge for the future.
First off, I am a private investor who is retired from earnings employment. I am not an investment advisor, not a tax expert, nor am I a certified accountant or lawyer. Since I am no longer drawing employment earnings, I am not eligible to put additional money into my IRA. The IRA itself has happily grown for over thirty years. But for someone in my position, the IRA* is a looming tax obligation since every dollar coming out of an IRA account is taxable at ordinary income tax rates. So this modest proposal is a personal "diary entry" on my private blog which is totally non-commercial. This is only what I am thinking, and I am not recommending this to anyone else.
To give us some US income tax context, here is the US income tax table for 1980. Any taxable income over $60,000 was taxed at 54%, and any income over $215,000 was taxed at 70%! Putting as much money as possible away tax-free was truly a no-brainer in those years. Recall also that the top income tax rates had been 90% until President Kennedy's tax cut in the 1960's! The tax table for 2009 is entirely different. The top tax rate this year is 35% of taxable income over $372,951 or half of what the rate was in 1980.
Summary: 1. A lot of the money put into IRAs of people now retired or retiring was put in when tax rates were much higher. 2. The US Congress could increase tax rates again to those levels and still be entirely within historic norms.
Guess what? What happens to taxes under the current White House and Congressional regime? The Bush tax cuts automatically will expire for 2010, and every democrat I've heard says the cuts will not be extended. That alone would send the highest bracket rate back to 39.6%. All the rob-the-rich rhetoric during the 2008 campaign and since then suggests that rates will go up much higher at the top end. There may a slight reprieve until it appears that the US economy has reached bottom, and that is precisely why I see this year and possibly part of next year as the last times to empty or greatly reduce the balances in IRAs. Most US Government revenues come from personal income taxes, and the government will need a lot more money just to pay the interest on all the astonishing total trillions of bonds needing to be sold this year to pay for all the rescues and pork. Summary: income tax rates were much higher when much of the early money was put into IRAs by current retirees. The rates are lower right now, but they are going up again.
There are some other factors in any decision to cash out a long term tax-deferred account. Besides the tax deduction for putting money into IRAs and 401ks, one expected, and sometimes got, large capital gains plus interest or dividends which could be re-invested tax-free. In the accumulation period of an IRA or 401k, before retirement, this was a very valuable feature. But when you retire you are less interested in gambling on uncertain capital gains. Also why would you want to take capital gains in a tax-deferred account and turn it into income taxable at ordinary income tax rates when you take it out in a few years? The uncertainty of capital gains (see 2000-2002 and 2007-2009) and the 35% tax on capital gains for money coming out of an IRA compared to 15% now in a taxable account are compelling reasons not to keep very much in capital gains-producing assets in retirement vehicles once you're retired. Summary: by the time of retirement the reasons for compounding capital gains and income are very much less important since you are then drawing down the assets and need to be more certain what they actually will be for budgeting your expenses and your life.
Once an IRA owner reaches age 70, the money has to start coming out as a percentage of the assets in it, and the annual mandatory withdrawal percent of assets increases every year. The IRS wants to be sure they get to tax it all before you die. So you risk getting pushed into higher tax brackets or Alternative Minimum Tax traps as the Required Minimum Distributions (RMD) increase every year. Investigate and see what these withdrawals are likely to be for you. (Note: this site is sometimes not available on weekends: http://www.hughchou.org/calc/irawith.cgi) Also there are other penalties or extra taxes for Social Security and higher Medicare premiums for those in higher tax brackets. There are very likely to be more of these penalties going forward. Summary: stay in as low a tax bracket as you can to avoid "wealth penalties" above and beyond income taxes.
Another possible, and frankly very scary, factor is whether the current world wide financial crisis could lead to nationalization of private pensions including IRAs. There was testimony to Congress last year on that very subject. Do a web search on it if you doubt me. We never expected nationalized banks in this country did we? But now we have them. Argentina recently nationalized private pensions, and it has happened in other countries many times. A government decides that you don't really need the money and they do. So they seize the assets in your fund and issue you "special" government bonds which aren't really so special for you at all. After all, your IRA was a "greedy tax dodge" in their rhetoric, so they feel justified in seizing it. This is most likely to happen when a government can no longer reliably sell its bonds in its own currency because the currency and the government are both no longer trustworthy. That hasn't happened yet in thr US, and perhaps it never will. But it could happen given the amazing amounts of government bonds and bills that will need to be sold to pay for all the new administration's plans for us. Summary: You are eventually going to pay all the tax anyway, probably at much higher rates, so why not pay it now and have the after tax money to invest privately instead of with Uncle Sam's "help"?
At the present time there also is a special feature available only in 2010 for converting regular IRAs to Roth IRAs. You still have to pay the same income tax on the money you convert to a Roth IRA, but everything in a Roth IRA accumulates tax-free, and whatever you take out of a Roth IRA is tax free, except for any new earnings made in the first five years of your Roth IRA. Normally there are very strict limits on how much you can convert based upon your tax bracket. You can read up on that if interested. But in 2010 there are no limits. Even if you have millions of dollars in an IRA in 2009, in 2010 you just pay the tax and convert it regardless of your tax bracket. Even better you can split-pay the tax due in 2010 and 2011. Bear in mind that this 2010 special ROTH IRA provision could be repealed by the present Congress, so keep your ears and eyes open as this year progresses.
Thus the reasons for emptying a regular IRA in 2009 and/or in 2010 are 1. you're retired or may soon be; 2. taxes will be going up so you will pay more tax on IRA withdrawals later if you wait; 3. you will avoid tax bracket upwards creep due to the always increasing IRS-mandated RMD's after age 70; 4. you want to avoid even the remote chance that private pensions could be nationalized; and 5. you want to take advantage of a one-time removal of limits on conversions to a Roth IRA and the two year tax payment option.
*More current retirees, especially those who must withdraw IRS-prescribed amounts each year, will have IRAs rather than 401ks. Most US federal rules seem to me to be the same for both types of tax-deferred retirement funds. To be consistent and clear I am going to refer only to IRAs which I know about.
Wednesday, March 4th is the next tide turn date. Thursday February 26th was the last one. Based on what I saw leading up to and on the 26th, I expected stocks to go down, and for crude oil to go down, but for yen, bonds, and gold to go up. Crude oil is unequivocally lower having made high on the very day, February 26th. Bonds and yen are marginally higher now than on the 26th. Gold is $6 under the low of February 26 at this time. I withhold judgment until the forecasted day, and even so it's sometimes not clear until the following day.
Perhaps I'll spend a bit more time on this method which I find useful both for trading and for longer term position entries or exits. The idea is the basis of Robert Taylor's "Paradigm: A Novel", 2006. The method is basically outlined in the novel and then somewhat further in several addenda after the conclusion of the novel. Taylor himself developed a variation on the simple tide tables which uses market data combined with tidal data in a complex mathematical manner.
At the time the book came out, one was given a year's subscription to Taylor's weekly service for stocks. The service email often had the turn dates one to two days away from the actual tidal extremes. I didn't find his subscription dates to be as helpful as the simple tidal dates, and I did not renew. I mention this only to explain that I am not divulging anything that was not in the book, including the program he suggested for doing the tide tables. There are quite a few free tide programs you can find using a search engine. The one Taylor recommended has a data base search function that I find useful: Tides & Currents Pro, Version 3.3, by Nobeltec Corporation. Nobeltec, controlled by Jeppeson Marine, sells equipment and software for the fishing and general boating population.
I produce the tables for each month of the year. Taylor also found that there were intermediate term trends each year and long term trends of some years, but I have not found them to be helpful so far. Christopher Carolan, who is on my "Blogs I like" list, has combined the short term tidal cyckle with his own "Solunar Model". The latter is a seasonal chart for years that have similar solar and lunar characteristics which you can read about at his site. His combined indicator looks very promising.
The following are my tide charts for March 2009. The six columns are six different ways of measuring the high and low tides of each day and the swings between successive high and low tides. I tally them for each day as to whether each one will or won't have an extreme, so there can be zero to six extremes.