Putting the pieces together...

2CS

My favorite and simplest sentiment measure of the US stock market is the 2CS. Take each day's CBOE put/call ratio and multiply by each day's VIX or VXO (I have used the VXO since 1996). Sum the last five days of the daily product of VXO times P/C. When that five day total or 2CS gets under 70 we can start to wonder about the possibility an intermediate term top somewhere ahead. Sometimes the market will stall or go sideways a bit and relieve this condition, and then go higher again. But sometimes 2CS will continue to fall as the market moves up and get below 60. 2CS below 60 is almost always indicative of a significant decline within a week or two.

As of 15:00 Eastern Time it appears that the 2CS will close below 60 for the first time since February 14 2011. The market stayed stubbornly near the high for three weeks before tumbling, a little longer than normal, and the market only suffered a 6.4% decline on a closing basis for SPX. Nevertheless I always respect the 2CS under 60.

SELL IN MAY AND GO AWAY

The monthly chart of continous gold futures shows a clear seasonal tendency for gold to sell off or consolidate from May into late summer or early fall. http://screencast.com/t/ur0AdxlCr2C4 Count over four bars from the first bar of the year.

In the past 12 years only 2004 and 2005 missed that pattern as gold had already peaked early in both years. The traditional explanation for the seasonal was that June graduations and weddings in the west and pre-monsoon festivals in the east (south Asia) were mostly over, so less jewelry fabrication was needed until starting for year end holidays after summer.

Despite the fact that gold is now bought as much as a financial asset as it is for jewelry, that seasonal tendency has persisted. Or perhaps as an investment asset gold has just melded into the general tendency of stock markets to sell off from May or June. http://screencast.com/t/F8fvatJFj3r

In any case I have been, am now, and will be lightening up on bond duration, on stocks, and on metals and energy exposure, and I am going away in May. Total gains year to date including all cash balances are 6.67% which annualizes to 21.67%. Of course by reducing volatile assets at this time I am reducing my chances to get to 21.67% gains for the whole year, but also my chances of surviving with gains of some type are better no matter what happens. 

The beauty of internet communications worldwide and the convenience of ETFs mean that one can go away but still stay in touch and easily make changes if necessary.

SILVER

When I was in Africa in the 1960's an older French woman at a cocktail party bent my ear on the subject of silver. The US had just abandoned silver coinage as it had abandoned gold coinage thirty years before. The lady insisted that giving up silver too meant the dollar and the US were now doomed. At that time the US dollar bought 5 German Marks or 4 Swiss francs. Now we get less than one each.

Also at that time in Senegal, where I worked, the President, Leopold Senghor, talked about the dreadful trade terms of Africa which shipped cheap commodities to the First World and bought expensive manufactured goods in return.

These two people were among my most important teachers of economics. Their advice led to a lifetime of investing in commodities and interest rates. I have some silver I bought in the 60's as low as 70 cents an ounce.

Silver made its modern low in 1992-93 after the 1980 high spike, but it remained fairly sluggish until a few years ago. Right now it is the most exciting asset there is. In the past few months I have had silver, and slower gold, ramp my year to date overall returns on all invested money to 6% from a previously +/- record.

I have used SIL, the silver stock ETF, as well as CEF and especially 3x long AGQ. At some point, of course, there will be a major pullback and a longer term consolidation. There is no way to teach someone how to ride a tiger and come out alive, but with US policy towards inflation and the dollar now extremely threatening to value retention, it's a good time to learn how to trade silver and other commodities with at least part of one's money.

For now, the buy and hold, set and forget portfolio is a guaranteed loss. With one exception... Don't forget that Harry Brown cut his teeth in times like this from the 1960's to 80's. One could do a Harry Brown portfolio today with 33% in each of three asset classes: world value stocks, world cash, and precious metals. I leave out bonds, except for traders and adjustable rate funds,  because they are terribly overvalued everywhere at very low rates and will have to be marked down amazingly. One can even make a good case for leaving out world stocks just now or least minimizing them.

It's not at all the environment I wanted, but we have to play the hand of cards we're dealt. A quote I saw this week from American writer Henry Wadsworth Longfellow put it this way, "when it rains, the best thing to do is let it rain." Politicians would disagree, but investors should not! Trade what exists, not what you think you should based on standard advice.

For The Duration...

I'm continuing to batten down the hatches as in 2007-2008. I could be wrong and I really hope I am, but I'm trying to reduce chances of a big drawdown in net assets.

Along the lines of reducing average duration of bond holdings in both tax-deferred and taxable accounts, today I exchanged PIMCO's wonderful Income Fund (PIMIX) for PTTRX. The income is considerably cut, but Bill Gross is cutting duration everywhere too.

Borrowing one of Gross's methods, especially in the Unconstrained (discretionary) Bond Fund (PFIUX), I added some "negative" duration by buying the triple net short long treasury bond fund TMV. Small amount, but with triple leverage and with its long negative duration it's more powerful than cash for cutting duration.

I will hold the Vanguard Ginnie Mae (VFIJX), Short term corporate (VFSUX), and conservative Corporate High Yield (VWEAX), as well as dear old Wellesley Income (VWIAX). The first two have quite short durations, and the last two are well managed and keep me well within the Vanguard Admiral category for services, costs, and commissions.

Given the rebounds today in gold and silver, I sold all the precious metals stock funds (SIL, GDX, GDXJ) due to increasing moves probably to tax and nationalize mines all over the world. A gold bird in the hand is worth two in the bush, literally. So I added to both physical gold and Central Fund of Canada (CEF) with approximately 50% each in gold and silver bullion. I am keeping AGQ, triple long silver, for the time being. It's up 48% in a month!

On any big run up in the closed-end funds I will exit them all and go into things like FXF and others of its family. Again here too I am taking a cut in income to protect capital.

Recommended reading is John Hussman's weekly "sermon" of economic wisdom from this Monday. http://www.hussmanfunds.com/ It's his genius to make the extremely complicated very understandable. He explains why the FED's attempt to get out of quantitative easing (QE) will be quite hazardous for major inflation and market risks even with tiny increases in interest rates.

Despite my fervent hope for a set and forget portfolio, the times we live in dictate otherwise. Nor have I found someone who is extremely expert over time and who will take on my accounts in a caring fashion.

We do what we have to do to preserve our financial freedom.

Portfolio Update 4/7/2011

This is a followup to several recents posts and comments regarding shortening bond durations in my income portfolio and moving more toward adjustable rate vehicles. Yesterday I sold the whole Loomis Sayles Bond Fund (LSBDX). It was a very good holding. I had sold it in 2008 before the worst of the crash and avoided a loss in LSBDX, and I bought it back in 2009.

Approximately 25% of the LSBDX proceeds were used today to buy more of ANH after it went ex-dividend this morning. The other 75% of LSBDX proceeds will stay in the money market fund for now which itself reduces overall portfolio duration considerably.

Yesterday I also exchanged one-half of PIMCO Bond Fund (PTTRX) for PIMCO Unconstrained Bond Fund (PFIUX). This manager discretionary fund has a very small duration at present (less than a year) and is paying about 3% versus about 3.15% for PTTRX with a duration over 4 years.

I'll be watching PIMIX closely. It has behaved very well these past three years, but does have a duration close to five years. I may end up selling part or all of it at some point and moving some or all of it into more of the Fidelity (FFRHX) and PIMCO (PFIIX) floating rate funds. FFRHX is a straightforward adjustable rate bank loan fund while PFIIX is long/short and leveraged. They make a good pair, but I'm no longer in a hurry after yesterday and today.

BONDS 101

I've just read two short articles on the basics of bond investing The first is by the lady who wrote The Bond Book, Annette Thau. https://personal.vanguard.com/us/insights/article/bond-book-04052011

The second article is by John Hussman about duration. He tells how to calculate it and what it means.

Also he explains duration as applied to stock equities, and a simple way to calculate it. Stock duration explains why stocks are so much more volatile in price than most bonds. http://www.hussmanfunds.com/wmc/wmc040223.htm

INTEREST RATE UPDATE

With all the FED members sounding off for the past few weeks and thoughts turning to rate rises or no, it was refreshing to read Chairman McNabb of Vanguard's letter to clients in the just-received Corporate Bond Funds Annual Report.

"With interest rates still near generational lows, it seems reasonable to assume that the next move may be up. Of course, a rise in rates is by no means preordained. Absent a crystal ball, diversification may be the next best thing. In fact, Vanguard research suggests that greater uncertainty about the outlook for the future--including economic growth, inflation, and interest rates--supports more fixed income diversification, not less."

Well said. I have three Vanguard bond funds, the short term corporate fund VFSUX, the fairly conservative high yield corporate fund VWEAX, and the Ginnie Mae Fund VFIJX with an average duration under three years. With their low costs and superb research and portfolio management they did very well last year

The PIMCO and Loomis Sayles bond funds I carry round it out, as do the closed-ends, REITs, petro trusts, and commodity funds (GCC and CFD).

Taming the income world is dealing with a totally different beast than equities which is field of play of 95% of private investors. The income world should not be an after thought to equity investment. For those living on their capital, it should be number one.