Putting the pieces together...

Another Look At Bonds

Most people I know in cyberspace love gold or stocks. I do too. But, being retired, I'm still liking bonds after a 24 year bull market. Many players have gone to extinction shorting bonds for decades now. The shorts will be correct eventually, but the bond folk have heard every anti-bond story imaginable, so they are staying the course.

Paul Krugman published his first deflation book in 1999 (remember 1998??). Gary Schilling and Lacey Hunt are very different, but they too have been pro-bond ever since.

I gave up on intermediate to long term bond funds a few years ago when they mostly went to the short term end where I already had a position. But the possibility of a parabola in long bonds if 3% went to 1%, as in Asia and Europe, was too enticing, so I've been short term trading the long side in 25-30 year Treasury strips with EDV.

Brazil

I'm very slowly scaling into Petrobras PBR. With $2 commissions this is feasible. EWZ will be a buy some day.

OOOPS the BOND

The bond has fallen. Can it get back up?

I had not been watching the weekly chart of the US Treasury long bond, and I missed the fork or preceding range bisect target. But I was lucky enough to have exited all my EDV (Vanguard 25 year T Bond strips) within a few ticks of the high. This was purely a trader's  momentum reflex profit grab. I have been buying EDV back, and am under water right now. I expect a bounce up to 152-152.60 in $USB, and then we'll see. Unless gold and oil go up significantly and the dollar and stocks down, it's hard to believe the 34 year bond bull market is finally over.

As for generic US stock equities, my VTI analysis of last week has played well, and I covered my hedge position in TVIX, the double short ETF of short term VIX. Considering the micro-plunge in most indexes, VIX didn't do very much, so I'm inclined to expect a bounce up. These very long expanding or rounding tops are emotionally exhausting, and it's best to be philosophical and not too committed either way until some confirmation of a breakout upward or a final breakdown.

Sentiment "divergence" is shown by the inverted VIX ETF, SVXY, with VTI closes in the green line. This phenomenon is rarely mentioned and is contrary to "contrarian" thinking that bullish sentiment is greatest at THE top. Well it usually isn't.

My five fairly conservative stock mutual funds are BERIX, FPACX, VMNVX, VWIAX, and HSGFX. Each of these hedges stock risk in a different manner. They are all still in my "backpack", although VMNVX is a sell candidate on a good bounce since I have no history on it in a bear market.

Investing During War

War exists always  in human societies somewhere. During most of human history wars were relatively isolated from one another and affected only the fighters and the localities where they fought. Nearly concurrent with the industrial and financial and political revolutions of the past 200 years, world-wide wars have become the norm. The Napoleonic War of the early 19th century was really the first modern world war, affecting most of Europe and much of the Americas and led to rapid colonization of Asia and Africa.

The council of Vienna after Napoleon's defeat, the League of Nations and other post WWI peace efforts, and the United Nations and NATO efforts after WWII were all based upon ensuring and administering peace by the victors. After the USSR and its empire fell apart 25 years ago, the US was the largest armed force standing and became even more so than ever the world's policeman.

During the past six years a major policy change has set the US to begin withdrawing from its world policeman committments in all the obvious places and by reducing its armed forces. A primary result is that all the normal, local wars of this era are free to develop without major interference. A secondary and more significant result is that intra-national revolutions and regional power grabs that were previously unthinkable, or, at least "un-doable", are rapidly encircling the globe.

Even in the absence to date of a major war among the greater nations, a world war of multiple lightly-linked wars has developed rapidly over the past three years. If it were not for the globalization of the world economy in the past 45-7o years, these individual smaller wars would not be having much of an overall effect. Marine piracy in the Arabian and Indian Oceans, Benin Gulf, and Malacca Straights is an on-going trade hindrance along with port seizures, pipeline and refinery seizures and air transport takeouts. In the absence of a global policeman, pirates and politicians on the move will only proliferate.

Global trade is key for many natural resource materials--oil, metals, grains and much more-- given that the natural distribution of them in situ is uneven. Those who need them most must import much of their need. The same is true for distribution of finished goods output from TVs and ePhones to autos, trucks, war materiel, and processed foods from haves to have-nots. Nor should we ignore the export and import of financial goods (stocks, bonds, etc.) and debt financing for people, corporations, and governments.

With this recent human policy of decreased policing and with our historic human tendency toward war at work, how should we invest, if we can? Should we assume that the traditional choice of exchange-listed stocks (60-80%) and tradable bonds (40-20%) will capture the beneficiaries of a world at war? Some say just do it and forget it as markets sort it all out for us. One assumption here is that markets will continue to function efficiently and another is that corporations will still represent economies to an extent greater than governments. Increasing involvement in the economy by governments everywhere, into crude goods in the ground, shipping, utilities, markets, banking, and aggressive taxing make us wonder.

Energy is the greatest trading sector: oil, gas, coal, and intermediate products such as lubricants and chemicals of all types. If we doubt traditional investment durability, either wholly or in part, energy is clearly a place for investment. The same is true for iron ore/steel, copper, and all the other industrial metals.

Agriculture has its own set of variables: population growth,decline, world weather and climate, fertilizer availability and policy, land ownership policy, taxation, war, and shipping. Some factors are the same as for energy and some are quite different and more variable.

Technical innovation is subject to many influences from war--migration of technical innovators and workers--to government control in war time, economic conditions, funds from demand and funds from entrepreneurial financing.

Finance and savings is a major concern with expanding wars and the ineluctable goverment growth in war and recent policy changes entail. Will the currency used where we live continue more or less on a steady decline due to central bank policy direction or will currencies decline in value more rapidly or collapse? Inflation is a normal accompaniment of war in every era due to increased government expenses and widespread economic disruption with decreased tax flows. Should we be looking to buy and hold currencies of countries likely to remain stable? What about day to day and normal expenses of life?

Clearly there are collectables and precious metals which generally do better than cash or financials during periods of war and threats of war and which preserve savings from inflation.

If you have read me in the past you'll know I've talked about investing "IN" rather than "FOR" retirement. Capital preservation and income were my main goals. Since income has been steadily disappearing over the past six years I reduced bond durations and exposure to the increased volatility of long term (duration) bonds. I've carried about ten percent in gold since the 1990's. As it increased in value and with additional purchases in the bear market since 2011, gold is now about 30% with some additional short term gold trading vehicles such as leveraged gold stock ETFs.

All bonds and "near cash" substitutes are gone, and cash is held in one to three month US TBills bought at auction. I have scaled into short US stock index ETFs, and will be looking to buy into some of the sectors mentioned above in energy, metals, agriculture, innovation, and finance if we get a reasonable pullback in world markets.

 

Meanwhile, Back at the Ranch...

The program outlined in December and April of unloading bonds and bond funds and keeping cash in US TBills and gold has continued. As today's earlier post mentioned, even TBills are not safe in the medium to long term, but for now they are safer than money market funds which are still in the FED's gun sights.

As it is, TBills are partially liquidated to buy gold and gold funds during big pullbacks, and that will continue. MFLDX is still a holding, and I am slowly scaling into a short SPX stock fund. When I have the time, I trade some of the leveraged gold stock funds, but only from the long side. I recently closed out a successful long trade in JNUG and will watch for a good re-entry point.

I'd much rather just sit back and earn interest on conservative bonds or funds, but there's nothing there  now.

US T Bonds Revisited

The US Treasury 30 year Bond rate is now in early December 2013 very close to where it was in August: just below 4%. Corporate stocks and real estate are up and gold is 14% lower (than in September). All of  the negatives from sequestration (cuts) in USGov funding, higher taxes, shutdowns, and higher interest rates, though still low, have not kept the economy from growing.

This chart demonstrates clearly that one needn't be very intelligent to understand why stocks have been rising since 2009. Alas I'm not very intelligent, and as a result I am having my worst year in a decade, down 4%. Bonds and gold have taken a toll. I am holding only 16.5% in stocks with an emphasis on higher yield preferreds, oil and gas trusts, closed ends, and hedged stocks (MFLDX, etc.). 41.4% is in bonds with almost all <2yr effective durations, 32.3% in cash, and 9.8% in gold. My belief  that stocks and the dollar will go down and gold up was premature at best. But with 74% in cash and near cash I have the freedom to respond to new events. 

Six Year Fund Returns

The past may not repeat, but sometimes past results are instructive for planning. Mid 2007 saw a peak in many financial and real assets. Many markets have now returned to 2007 highs or exceeded them, so it's useful to see how some funds performed over this extremely volatile period.

During this period stock  indices plummeted and recovered as did non-Treasury bonds. Commodities and gold fell, rose greatly and fell again. Real estate crashed and rallied some. Overall it was a disinflationary period start to finish with an inflationary scare in 2011.

With the exception of Vanguard S & P 500 Index fund VFIAX, I have owned  all of these funds. I still own the others except for TFS Market Neutral TFSMX and Vanguard Wellesley Income VWIAX. All of these funds were open (accepting new accounts) in 2007 and had several classes with different minimums and annual expense ratios.

My goal in retirement has been to avoid excessive downside volatility. I had no idea the 2007-2009 bear market would be so severe, but the funds I held outperformed broad stock market index funds like VFIAX which was down almost 50% on a month end basis by February 28, 2009.  http://screencast.com/t/ZHWbzcb9

FPA Crescent Fund FPACX, a midcap  balanced fund which increases cash holdings proactively when they see trouble, was down 25%. Loomis Sayles Bond Fund (investment grade) LSBDX, MainStay Marketfield MFLDX (see below), and Vanguard Wellesley  VWIAX (40% dividend stocks/60% investment grade bonds) were down 19%, 18%, and 16% respectively. Pimco All Asset All Authority PAUIX (inflation hedge fund) and TFS Market Neutral TFSMX (short broad indices, long selected mid caps) were down 9% and 6% at end February 2009.

None of these escaped damage, but the average was down "only" 15.5% compared to 49+% for VFIAX. If one averages in one's cash and even Pimco Total Return Bond fund PTTRX which was up 11.3% at end February 2009, total portfolio value was almost exactly even for the period from mid 2007 to March 2009. Of course one could not have known in 2007 how well relatively new funds like MFLDX or TFSMX or even PAUIX would perform in a major financial crisis or that one would occur. The point of a portfolio like this it is that it had relatively low volatility in a very volatile period, in crash mode, in disinflation, and in inflation periods.

The next time this happens we will quite likely not still be in a long term bond bull market, and that could make a very big difference in these specific funds' performances. Time spreads in futures, options and other derivatives are very dependent on near and short term interest rates, as are bonds of course, and that makes hedging of all kinds more expensive. All of these funds shown here are "hedging" funds in one way or another. All of them also are discretionary as opposed to being index-mimetic.

MFLDX is a stock hedge fund in the classic sense, but even VWIAX and FPACX hedge their longs with bonds and/or cash. FPA is the home of the famous near cash fund FPNIX, and their cash is managed by FPNIX and the cash ratio to total assets varies with their stock market views.

TFSMX  differs from MFLDX in basically being short the whole market in as much size as they are long their specific picks, whereas MFLDX shorts what they see as worthless stocks against their favorite longs. They both have to be very good to have good returns. But TFSMX doesn't have to be quite as good as it is easier to short the whole market. But their overall risk is also less than MFLDX's risk. And looking at Hussman Strategic Growth Fund HSGFX we find a fund that has lost money since 2007 by doing poorly what TFSMX does well.

Unfortunately, neither MFLDX nor TFSMX is accessible to most of us at this time. MFLDX is still managed by its founders, but is now marketed by MainStay for the past few years. Original investors (lucky me) were allowed to remain and to add to positions, but new accounts are for $5,000,000 minimums. There are some other open classes of the fund which have higher annual fees and other expenses. TFSMX has closed several times to get a firm grasp on handling large inflows, and has now been closed to new accounts since 2011.

We can look, for free, for closed-end funds which do many of these same functions at CefConnect.com and for alternative funds at Morningstar.com on a trial subscription. Closed-end funds tend to be more volatile than open end mutual funds.

For the entire six year period the  funds featured here did well. http://screencast.com/t/FIPQQAFm

As already mentioned, in a bond bear market LSBDX, PTTRX, and VWIAX would not likely do as well as the others. But if we admit that we don't know what cards the future holds for markets, we might still wish to have some creative bond funds.

Stocks, Bonds, and K Wave

I'm settling back down to work in cool, green Minnesota after winter and spring in Mexico and Arizona. In late March I discussed the 2CS which made a low of 49 on the March 14 in that measure of bearish fear with SPX at a close of 1563. SPX made two moves down to its 50 day moving average in late March and again in late April before zooming up to a close of 1669 and nearly a double bottom in fear at 2CS 51 in late May. In a month SPX gave back all the gains from mid March, and most of it in four rough days.

http://screencast.com/t/8uDaF0zPZ

The high on Thursday (June 27) and today (July 1) was back at the 50 moving average fom underneath. At the June low the 2CS went as high as 110 which is typically enough fear to energize a rally. I suspect there is more down to do.

I was asked my opinion at SI on the Kondratieff Wave after someone posted that the wave can't yet have bottomed since US interest rates are so low. This is my take:

"Except for Treasury rates, the Kwave "winter" had all ended by 2003. The transition began in 1998/99 when Paul Krugman wrote his first "neo-depression" book and when a briiliant trader friend started buying hog futures calls as hogs fell to 1919 prices!

The Kwave is all about crude goods/commodity prices, and, in a free market, interest rates roughly parallel commodity prices trends.The FED basically took over control of interest rates ahead of the infamous 1/1/2000 computer non-snafu, kicked control up a notch after 9/11, and pumped away in 2002 and mostly ever since excepting 2005-06. Absent the FED, rates would have bottomed normally in 2002/03. This same political goose cooked from 1942-52 all the while the FED "pegged" short rates at 0.5% and the long bond rate at 2.5%. (There was a late May ZeroHedge article on this 1940's history which is worth a glance via a search engine.) Interest rates did not really break free permanently until after the severe 1957-58 recession, but most commodities had made final lows by 1949.

I think 2008-whenever (2013/14) is merely a mid-course correction in a long term Kwave commodity bull market phase much as 1987-93 was a mid-course correction in a long term stock bull market. Interest rates, IMO, are immaterial to an analysis of the Kwave at this point in history. They will catch up one of these years when the FED loses control as they did in the 50's and 60's. Of course I reserve the right to be wrong."

Despite these remarks, it's still possible that rates can fall further. Even though I had steadily shortened bond durations in my portfolio for the past several years, I have bought a small, leveraged position in EDV which is a zero coupon long Treasury bond fund. My reasoning is similar to an analysis today by John Hussman. http://hussmanfunds.com/wmc/wmc130701.htm

"The bottom line is this. Short-term interest rates will be  pegged at zero for quite a long time, because raising them even slightly would  require not just tapering, but a massive reduction in the Fed’s balance sheet. The securities that compete most closely with  default-free short-term money is default-free long-term money, which is why I  view Treasury bonds as increasingly compelling as interest rates rise,  particularly in a tepid economy with no material inflation pressures. Security  types that normally carry significant risk premiums (like stocks and corporate  bonds) have already seen all of the likely benefits of QE, and any return to  historically reasonable risk premiums is likely to batter these securities.

So while I view a reduction in the pace of the Federal  Reserve’s quantitative easing purchases as likely in the months ahead, regardless of the course of the economy, an  actual reduction in the amount of those holdings seems unlikely for years. As a result, short-term interest rates are likely to  be pegged near zero for a very long time, and the lack of yield on short-term  default-free investment options is likely to support demand for the most comparable  default-free options – namely medium and long-term Treasury debt. I don’t  believe that the same argument extends well to securities such as stocks or  corporate bonds that have traditionally been priced to reflect significant risk  premiums, and where we estimate present risk premiums to be extraordinarily  thin.

In my view, much of the recent selling has been based on the  idea that the 30-year secular bull market in bonds is over. The more relevant  issue is that there are no material upward pressures on short-rates, inflation, or  economic growth here, the difference in yield between 10-year Treasuries and  3-month Treasury bills is already greater than the long-term norm of 1.4%, and  the potential for credit shocks remains material. In that environment, I  believe the main consideration is to have the flexibility to extend durations  on spikes in yields and reduce durations when yields are depressed."

Gold Update 2013

When I look at the chart 

of gold prices since the 1999 low, the last 18 months sideways moves do not resemble a major top in any meaningful sense. It has been the longest time period of arrested activity since the 1999 low, but the maximum price correction to 1526.70 to spring 2011 was only 23.6% of the rise from 1999. That's been painful for leveraged accounts, but not remarkable for a bull market correction.

 

I'm resisting the temptation to print Elliott wave numbers on the chart since there are always at least several possible counts one can make. But if we look at a monthly logarithmic chart the whole process since 1999 to 2011 looks like a solitary wave.

 

The 23.6% correction, a Fibonacci ratio, also suggests that we have been wandering in a belabored consolidation of the whole move since 1999. These simple chart observations in turn suggest that the bull market is not over, but it does not tell us when the climb will resume. It's even possible that the correction completed in August of last year, although if this is a correction of the entire bull market, it might well take longer in time. In fact it probably “should” take longer. A twelve year bull move might realistically need at least three years of consolidation, meaning 2014 would end it. Quite a few non-goldbug inflationists with good credentials expect inflation to remain subdued that long. But I'm only looking at this from a chartist perspective, not at economic or political analysis.

 

For gold speculators or investors it's best to trade the minor swings in a consolidation while holding a core position which is untouched. Given our normal human tendencies, it's hard to do either one of these things very well.

Sometimes it's easier to take a longer term view if one simply thinks of a
portfolio's gold as insurance. When we buy home, health, or life insurance, we don't really hope for a nice payoff. We buy and keep insurance “just in case”. Hopefully our house won't burn down or be swept away in a storm, nor will we have a devastating illness or death any time soon. Then too, one could say that all longer term investments are insurance for a brighter future, or at least a future that keeps up with or does better than inflation and taxes. Those two are always our enemies along with entropy and aging.

Follow Up on Simple Portfolio Management

I wrote briefly about WealthFront recently, and appreciated the comments made here as well as emails and conversations and comments elsewhere. It's cheap for a reason, and that reason is simplicity and very basic marketing and operating plan. It assumes that the capital asset markets ARE priced correctly all-in at every instant and that most attempts to predict are fruitless. So they want to put clients all into the markets all at once no matter what relative asset valuations may now be. This is obviously geared to a very young investment client audience which is a good idea both for the client and the marketer, but not for mature clients.  

Another real issue is with their ETF selections. Using a commodity ETN is silly, dangerous, and has been widely criticized. They don't wish to deal with K1's so they are avoiding the single best and most tax-advantageous ways to buy actual commodities, such as the Deutsche Bank futures ETFs or, best of all, GCC (Greenhaven). (Van Eck also has three classes of a commodity mutual fund, but they don't fit into an ETF world, are expensive, and are hard to buy.) 

Likewise, using Vanguard's Total Bond Market BND is not well thought out for such a large portion of most portfolios. It's a fine fund, and quite cheap, but it is far too  heavily weighted to US Treasuries which are about in the position that stocks were in 1929. Bonds are too subtle and too complex and varied to use a "cap-weighted" index. A much, much, much better ETF would be Pimco's BOND which is very similar to Bill Gross's flagship PTTRX Total Return Fund.

The concept of an inexpensive packaged management system has great allure for us all. WealthFront has competitors now and will have a lot more in the future who will do it in a more sophisticated and profitable manner than the current lineup.

 

 

 

 

 

 

"Trading" and Trading versus Holding, Part I

It is now well understood that buying and holding generic exchange-traded stocks for the long term has not worked for some time. Since January 20, 1997, fourteen years, the Vanguard SP500 fund's total return with dividends reinvested was a very modest 5.42% per year while the Vanguard Total Bond Market fund returned 6.02%. Starting the comparison from January 2000 was even more devastating for stocks, with the Vanguard SP500 fund returning only 0.92% annually. Currently stocks have been rising for a while while bonds are falling, therefore there's a possibility that this long ten to fourteen year period of stock under performance and bond over performance could see a reversal of fortunes. However, quite a few respected investors and managers feel this period of reduced stock returns may well persist for several or more years.

 
 

 

On the other hand many people made a lot of money in stocks over those ten or fourteen years by NOT buying and holding the same stocks for years. Doing this requires much study, work, and skill. Very few can make a million dollars out of ten thousand during their first year of trading, or ever. I won't go over all the methods of trading running the spectrum from basic fundamental analysis of individual stocks through many different methods of technical and sentiment analysis of markets. There is a long learning curve for most of these methods and much, much work. How about something that's easier, at least easier to understand for a novice?

 

Another reason for asking how to approach trading, besides the failure of buy and hold for the past ten to fourteen years, is that retired investors now face a daunting task of making enough income off their retirement funds due to extremely low interest rates. Also even if new retirees buy bonds now, a bond bear market would not be a pleasant experience for them. Famous investor Bill Fleckenstein, who tries to hold stocks for one to three years, recently observed that there really aren't any safe investments now. Everything we buy (or sell!) is a speculation given the loss of faith in the system, the massive intervention of governments and central banks, and artificially low interest rates.

 

Whether we are in the accumulation or growth period of investing or in the retirement draw-down phase, most of us are going to have to get involved in trading, one way or another. The laid-back way to do this is to find mutual funds with excellent records which have the legal (SEC charter) and proven historical ability to change the mix of asset classes as the markets change. Bob Carlson of Retirement Watch refers to them as "hedge fund mutuals". Heather Rux, a long time poster at this site, and I have also written about some of the same funds over the past few years. In my view three of the best are Hussman's Strategic Total Return Fund (HSTRX); PIMCO's All Asset-All Authority Fund (PAUIX or PAUDX), guided by Rob Arnott, the allocation master who can move around amongst almost any of PIMCO's excellent funds; and Oakmark's Equity and Income fund (OAKBX) which is a thinking person's balanced fund.Equal dollar amounts of the three funds would have returned 6.65% annually over the past five years with rather limited volatility in the most volatile period of modern investing. They have an almost identical record over the past seven years which is as long as all three have been trading. OAKBX has returned 11.37% annually over the past fifteen years. These "trading funds" are as close to "set and forget" as I can imagine.

 

 

 HSTRX paid 1.25% in dividends in 2010 while PAUIX paid ~7% and OAKBX about 1%. So they are not "income funds" in any high yield sense, but at an average of 3% they would work for a taxable account as the "retirement conservative growth" part of an overall portfolio. All of these will be able to increase their yields as rates go up, but since they are not, by choice, holding long term (or extended duration) bonds, they will lose very little bond capital. All three managers are extremely good at bond selection in their funds. I should also mention that all three managers include some foreign stocks and there are currencies and commodities in the PIMCO and Hussman funds and other assets. If Oakmark is closed to new investors where you buy your funds, you can buy it directly from Oakmark or use FPACX which has a similar approach and yield and an even better fifteen year record than OAKBX. These three funds could do it all for some people and do it well.

This is a laid-back conservative growth and income "trading portfolio" whose managers do the trading for you at a far, far smaller cost than a hedge fund manager would demand. In two more blog posts I will try to put together a similarly "laid-back" higher income portfolio which is not too complex, and finally a way to do some trading without too much work for those who wish to try for more capital growth, whether in retirement or not.

Shuffling the Deck

With two new big spenders and easy lenders ascending to the Fed, Bernanke clearly has the votes to do more Keynesian mischief, or even madness, as he sees fit. The markets see this power and intent as another boost to various market asset classes as it has been since Mr B started his easy regime in 2006. As Martin Zweig always said, "don't fight the Fed", and I won't. Nor have I fought the Fed with my consistent gold bias, but I have been uneasy being very much exposed to equity markets except indirectly or in mirrored fashion through Loomis's and PIMCO's holdings of corporate bonds.

Also for quite some time I have held some hedged equity funds: HSGFX, TFSMX, and PFATX along with some traditional "balanced funds" like VWINX, OAKBX, and FPACX. These past few weeks I have cut these out except for a modest residual position in VWINX. I am sympathetic to insistent value managers like Hussman, but there hasn't really been much real value in equities since 2004 after a great run in value on a relative basis from 1999-2004. With Bernanke's money flood supporting the market, value seems likely to wait even longer for a comeback.

Market  sentiment measures have been a mixed bag with special volume studies suggesting exuberance while derivatives action remained mid range in exuberance.  I got blind-sided by the volume part for a few weeks.  Interestingly, Don Wolanchuk's view has always been that low volume on stock market rises is bullish, and I am seeing evidence of that for myself. There used to be a lot of overnight gaps in the markets, but with 24 hour trading  we rarely see day to day gaps these days except occasionally over a weekend.  Could it be that low volume trends are the modern equivalent of  no volume gaps? There is a lot of comment about how this rise cannot be for real on such low volume (on many days, at least), so Wolunchuk's idea rings a bell.

The 2CS (5 day total of daily CBOE P/C ratio * daily CBOE VXO) is still in mid range after several weeks. So exuberance is much more muted at this price level than earlier this year in the same price range. you will naturally note the 200 week moving average right  here  which stopped the 2009-2010 rally in May. If the Dow can punch right through I'd not be surprised to see a more exuberant rally follow. 

Coincident with closing out the hedged funds and their balanced cousins I began adding  more quasi-equity exposure. first I added back three of the US oil & gas trusts, CRT, PBT, and SBR. To keep things simple these are balanced almost 50-50 in oil and gas assets (overall) and all  three are what Kurt Wulff (of McDep.com) calls topline royalties, meaning that they do not share in expenses, only in the sales price of oil and gas sold by the operators. Since these pay ~8% (but not, of course, fixed), I was able to decrease lower paying bond funds such as PTTRX, although the latter is still my largest holding.

I had taken considerable profits on CMO PRB at around 15 and have been buying it back as it falls. It does this several times per year, but there is always the worry that a preferred stock paying 9% and trading above its call price could in fact get called. This preferred stock has been out there since 1993, but they could save some money by issuing a new preferred at a much lower rate. I have no way of knowing whether that's possible or probable, but >9% gives some cushion.

As part of my new equity look I bought some starter VSS (non-US small caps) a few weeks ago initially after noticing how many of their largest holdings were gold miners. Then I bought some SIL which is a silver mining stock ETF. This allowed me to get rid of ASA which had narrowed its discount to net asset value to 3% versus its normal 9-10%. This sign of exuberance was well-timed as I side-stepped the big gold decline last week w.r.t. ASA. I have mixed feeling about ASA and its new management.  Their board seems naively fixated on narrowing the discount by buying in shares at the same time they are talking of  starting an investment advisory business . They are reducing funds under management just when they want to increase them!  I guess they feel that if they can't keep the discount closer to NAV it will look bad to prospective management clients, but it's still schizophrenic. Another problem with ASA currently is that they have unloaded almost all the shares in South Africa that distinguished them over the years, so it's hard to see that they have much distancing them from GDX or the better gold mutual funds. One thing I always liked about ASA was that you could buy their holdings at a discount, but they seem hellbent on destroying that advantage. Add to that the fact that they are a passive foreign trust to the IRS and for US investors with the added accounting cost that entails for shareholders. Goodbye old friend!

I noticed on the Vanguard EFT list that VNQ (REITs) was their biggest gainer on the year and VSS was close behind. Also VCR which is consumer discretionary US stocks.  Other issuers have similar ETFs, so this is just an example of what's out there, but, as always, Vanguard's costs are very low. Vanguard and several others (Fidelity and Schwab come to mind) also give commssion-free ETF trades to their clients. Normally I'd look at underperformers as a contrarian bet, but if this proves to be a breakout in a trend (the 200 week moving average), I'll stick with the ones that got us here for now and add to VNQ and the rest.

Several weeks back I also added on to Vanguard's precious metals and mining fund (VGPMX)  and Tocqueville Gold Fund (TGLDX). Although a larger precious metals pullback seems possible, I'll hold in on these funds unless a loss of gains to date looks possible. (No bullion has been or will be sold.) Speaking of gains, the entire corpus of the portfolios including gold and all cash are +8.6% on the year through Friday. Not too bad for the "new normal" era and with a lot of cash and near cash.....so far.

Economic Tectonic Plates

In this century two large economic forces have collided like geologic tectonic plates. The first is the longer term (2-3 decade) inflationary trend with lows set in place from 1998-2001. The second, currency debasement, implemented by artificially low interest rates used to "solve" a variety of debt crises around the world ever since 1997-98, reinforces inflation. So we have inflation heating up even as cooler deflationary recessions occur. This setting is very similar to the economic long wave transitional periods of the 1890's and 1940's.

 

Thus whatever the central banks and national governments do to ameliorate the debt and deflation issues (primarily by setting rates too low) the effect is an increase in prices by debasing the currency. Neither institutional nor private investors can make an "honest dollar" when rates are suppressed and currencies debased. So short term speculation and market volatility rule. Kiss stable growth good bye.

 

The capital of operating companies is also eroded and real balance sheets become tattered by taxes on phantom profits and inadequate depreciation. So even minor slowdowns  result in multiple bankruptcies and accelerating unemployment. As state unemployment insurance rates increase for all employers due to increasing unemployment claims, and various taxes increase to fund expanding nationwide "safety net" programs, companies look to foreign sites for refuge. And so the economic death spiral descends further even as prices accelerate up. (See my comment on Fekete's work below.)

 

Keynesians don't know real economics and theoretically don't need to since they already have at hand all the answers to every problem. So no one in an "official" position (or academia) learns from their mistakes nor can even see them. The markets therefore do what markets always do in response and are reinforced in volatility by stimulus and failure followed by more stimulus. On top of this we now have a quasi-Marxist government (administration) rolling out more wealth re-distribution and unfunded benefit plans and ignorant regulation/ownership of ever more market sectors. They are very reminiscent of the Brezhnev orthodox party's last ditch attempt to save the rotting Soviet Union before the cracks in the edifice became too large and numerous to ignore. Bad times are coming,,,but Andrew Mellon would disagree on their being bad times. So would Schumpeter. Both were advocates of allowing, even encouraging, the rotten debt and policy to liquidate itself.

 

We don't know when this will happen, but we many are now aware of sovereign debt default issues. Once this awareness is widespread, we can expect a replay of the serial currency attacks that played out in the early 1930's in Europe as country after country was forced by speculators to devalue and go off gold. Of course gold isn't an official issue now as no one is "on" it, but gold will still be the primary beneficiary.

 

On a more practical level, we may be coming closer to the end of the "Big Bounce" out of the grossly oversold all-asset market bottoms of November 2008 and the March 2009 re-test of November 2008. It's not clear that this past 15-18 months has been anything other than an oversold rally. Nor is it clear that so-called retail level stimuli have played a lasting role other than modestly tempering the pain of average citizens in the US and elsewhere.  ECRI reportedly predicted this past week that recession is not expected this year but that a slowdown is coming in the second half and that recurrent recessions may be expected in the new decade.

 

We don't trade on these longer term and shorter term economic fundamentals, but we do "invest" with them in mind. It's possible, and I hope, the markets will repeat the benign 2004 to 2007 recovery experience, but it's also possible they will not. Hussman Funds' Bill Hester describes how stock valuations are now out of line with recent inflation volatility, namely P/E's are historically too high. Look especially at his chart titled "Economic Uncertainty and Valuation" and the red dots representing the last six months of data.

 

At my lowly portfolio level I have some excellent capital gains in a variety of high yield instruments (closed-ends, open end bond funds, MLP's, preferreds, etc. as detailed in the recent portfolio update), and some are beginning to sell at premiums to NAV and sport dropping yields at market prices. For a lot of reasons many of these instruments trade as equities do. It's prudent to sell some of these with outsized gains whether at a premium or not. The same is true of some of the equity funds like FPACX, OAKBX and the Vanguard special sectors funds (health, energy, mining).

 

Although market technicians I respect, like James Stack and Terry Laundry, see no internal market deterioration yet and expect further stock market gains this year, my own sentiment and volume studies are getting to the edge of frothiness again, as in January. None of this means we must make an intermediate or longer term top now or even this year, but the longer term fundamentals are looming. But should one sell off a lot of this exposure to cash and near cash again as in 2007 and/or hedge the rest? And what would be the better short to intermediate term hedge? US Treasury's again as in 2008 or gold. I have some of each but much more in gold right now. Learned opinions vary on whether we'll first see a return of deflation fear or go right into currency devaluations and higher inflation IF a stock market downturn is coming. Preferably (to me) we'd see Treasury's zoom first and gold come off to 600-900 where I would double or triple up.

 

In any event I have only about 3.5% in cash now, and that's far too low after the good gains of the past15 months. So if the 2CS continues to drop (at 79 as of Friday), I plan to start peeling out of some holdings and looking to hedge.

Emotion and Validation

1. I think emotion is predictable, that is certain kinds of emotions lead to certain kinds of outcomes and mass consequences. When people are stunned by losses they are immediately angry and then anger soon turns to quietude or depression. Nothing much happens for a while because personal conviction is gone and apathy reigns. People "get along" or muddle through on inertia instead of conviction. 1931-35 was like that, and 1938-42, and 1974-82 and 1988-1992.

 

The mania of 1996-2001 was re-energized after 9/11 and continued on in family safety cocooning and cocoon equity extraction as marketers figured out the national mood and served it too well. The safety cocoon mentality has been dealt a major blow since 2005/2006 and won't recover for a good while.

 

Every normal asset class in developed and developing economies was driven to overvaluation, from bonds and stocks to real estate and commodities and currencies, since 1982 and 2002. Cash is now the most undervalued asset class and gold is next. Values are developing in stocks and real estate but liquidation will continue. Even gold is being liquidated but it is needed to validate cash in an inflationary time. cash validated by gold allows us to shop patiently for bargains before the next flight.

 

2. The 90 year old, sturdy, San Francisco fund and private money managers at Dodge & Cox and many, many others fell into a deep mine shaft this past year after decades of success. Their office was down the street from me, and I knew a few of their management casually. But many retired and new analysts and in recent years partners of a contemporary bent came on in droves who thought that conservative value investment principles were a simple formula  of buying unloved stocks. I could see early last year that they were "losing it" and got out early. Their flagship Dodge & Cox Fund DODGX is down  41% on a total return basis on the past 12 months according to my FastTrack data base! Even more conservative operators over the past two decades like SGENX and LSBDX are down nearly 20% total return (including dividends)  for the past 12 months. That's totally devastating and inexcusable.

 

There is no way that investors over 35-40 years of age can just buy and hold indexes or  even solid managed funds and assume all will be well. We have to be diversified and we have to watch the investments like a hawk and cut them out when they start doing things price wise they haven't done before.  Fire them when they start "acting bad" by moving to cash followed by thinking and looking. If we lose 40% in a year we have to make 67% the next year just to get back to where we were, assuming no taxes which could make it even worse.

 

Skepticism and fear of losses can serve us well, not stop loss orders. Money managers don't want you to move your money since they will lose the fees we pay them whether in mutual funds or separate accounts. Fund super markets like Charles Schwab, Vanguard, Fidelity, T R Price and others let us manage our own money if we will learn to do it. Otherwise we are doomed to mediocre performance. Mediocrity may work over a 50 year period when we are working and saving, but not when we need to live on our money. Get those concepts clearly in mind.

It's Not Over, But It's Different

This is a period of careful watching and waiting for investors. A battle is raging between the strong forces of inflation and the potentially strong forces of deflation. The battle has been going on all year, but the ante has been raised with the Congressional action and the sudden deteriorating jobs and output statistics.  In the long run I firmly believe it is inflationary, but the concept of serious recession has just begun to set into most minds it this past week. Beliefs are not nearly as important as market action at such a time as this.

 

All year we have seen "inflation days" or weeks followed rapidly by "deflation days" or weeks. The 30 year US Treasury bond futures and US dollar are the deflation players and gold and crude oil have been the major inflation players. I have fairly successfully straddled this chasm, or hedged it, in my family investment accounts, and as of Friday I am down 0.52% on the year. This does not include bank accounts,  personal effects, auto, home. I consider it a triumph, but I could and should have done better.

 

My major mistake was staying too long with too large a position in LSBDX which I began reducing in mid August about the time of  this post  and I finally got LSBDX down to one-third of its previous size. The nearly 8% yield wasn't a great enough buffer against the fall of high grade or high yield corporates, nor did HSGFX hedge it as I expected. That Dan Fuss and Bill Gross took some similar hits as well is scant comfort. I put most of the proceeds into VSGDX which is about one year duration "Treasuries", formerly known as "Agencies". I still have a sizable piece of VFIJX which is four year GNMA's.

 

On the taxable side I have both the one year Vanguard muni fund VWSUX and 2.5 year muni fund VMLUX. Governor Schwarzenegger's apparent application to the FED for a $7 billion loan on Friday is making me move the second fund to the Vanguard muni money market fund and possibly to more gold if we don't see some positive response to the Congressional pork pie passed and signed on Friday.

 

In times like these, and even for retired people, income may need to take a back seat to capital preservation for a while. It might be better to spend a bit of capital out of a money market fund than lose it in something stupid, and to keep a lot more in gold. I had only been semi-joking when I told friends at the beginning of the year and before that I was assembling a "Hillary" portfolio of short term muni's and gold, on the basis of probable tax increases and inflationa in a democrat-controlled Congress and White House in 2009. Currently, however, events may depend less on politics than on economic and financial reality. There is wide-spread unhappiness on the right and left about what has happened last week, but at least "the plan" was done by concerted action of both the republican and democrat "moderates" under President Bush. I think they all recognized the potential for major social unrest if there wasn't a broad coalition or it was put off until February 2009 or later.

 

This is no longer the Roman Republic, folks. Julius Caesar and the traditional Senate are dead, and we're into the Empire. To crudely, but respectfully,  paraphrase President J. F. Kennedy, "ask not what your country can do for you, but what you can do for yourself". Use your ears and eyes and brain in all aspects of your finances and life.

 

 

The 50 year old lady with only $57,000 in her 401K

I've been haunted by the statistic I quoted from Rick DeBruhl in my last blog post that the average 50-something year old American has only $57,000 in her 401K (including IRA, I suppose). I've experimented with Hugh Chou's excellent calculator for accumulating a tax-deferred corpus and then dispensing it gradually, as required by the IRS, at age 70. The assumptions I made were that realizing how inadequate her savings would she would thereafter put $750 each and every month into the 401K or IRA, and it would earn, by choosing wisely, 7% per year until age 70 and then 6% thereafter.

$750/ month is $9000 per year but it compounds better if it's done monthly and it also becomes a routine like paying the mortgage or rent. Also 7% per year before retirement and 6% afterwards are conservative goals which can likely be met.

If she does this simple program, she will have $333,766 at age 70. Using the IRS required minimum withdrawal at age 70 (do it in 1/12's monthly!), it would start paying out at about $2000 per month or about 24,000 per year. By age 80 it is paying $37,407 per year or a bit over $3000 per month and at age 90 $54,962 or nearly $5,600 per month. There is also a column which shows the purchasing power results after an assumed 3% annual increase in inflation, the average since 1946. Add on $1000-2000 per month in Social Security payouts, and one could live a modest existence.

We can experiment and see how much we'd need to put in to make the payouts even larger, but I'd recommend leaving the annual earnings increases  fairly low in order to be realistic. If you find this was a helpful exercise which can change your future, think about making a small donation to Hugh Chou at his site. Here is the calculator I used: http://www.hughchou.org/calc/irawith.cgi

Bear in mind that I am an amateur myself, but this "is" something you can do at home.

(Click on the tiny image to enlarge to original size.)

Facing The Ultimate Life-Style Reality: Taxes and Planning In Retirement

Both words, taxes and planning--all of the words really--connote "totally boring" compared to the excitement of huge capital gains. But there comes a time....

Part One

Assume that you are at a point in life, retired or otherwise unemployed, willingly or not (disabled), and you begin to live off your assets. If you are retired willingly then you will have figured out what you have (in dollars) to live on and can see a way to earn the dividends and interest on those assets that you need to live in on. You will have, won't you? If not, you are living in a fantasy world. Be sure you included income taxes in that figuring. Unless you want to work part time at Wal Mart or daytrade eminis, be sure you can really live off your assets for twenty to twenty-five years. If not, you are merely taking a short term fantasy vacation from working for a living which will come to and end when the reality of your wasting assets versus the expected years of your survival becomes evident. If you are 35 or 45 years old and do this, you can reasonably expect to recover after you "get real", that is, after you realize you were completely wrong. Otherwise and especially over 55 years old, you struck out. In that case, get a copy of George Ure's "

How to Live on $10,000 a year (or less!)." http://peoplenomics.com/bookstore.htm#10k It can be done, but this also requires a life committment. These are extremely serious issues.

Part Two

If indeed you have enough dollar assets to live on without major life-changing down shifts in life style, taxes and planning are still very important. In the US it is common for people to have assets which are tax-deferred (IRAs or 401Ks, etc) and assets which are after tax: bank accounts, brokerage or mutual fund accounts, etc. The closer these assets divide into equal parts of tax deferred and after tax sources, the better off you are for planning.

On US tax-deferred accounts you really owe income tax on every dollar in the fund regardless of your age, and at 70 years old you have to take out an increasing amount each year so that the government gets its complete share before you die. Think about that for a while. Once you are withdrawing, willingly or not, I hope it is clear that capital gains in tax-deferred accounts make no sense at all. Capital gains taxes are, until 2010, as low as 5-15% in the US for long term gains, and short term gains are taxed at normal income tax rates. So why try to make long term capital gains in a tax deferred account in retirement when everything will be taxed at ordinary income tax rates? Is that crystal clear? It is riskier and less certain (redundant?) to get long term gains than to get interest or dividends, and the extra risk for capital gains in a tax-deferred account is punished by full taxation.

Think this all through again very carefully: for US tax-deferred accounts during voluntary (any age) or involuntary (over 70 years old or disabled) draw downs, capital gains, except for short term trading, make no sense, and you should be going for income from interest (bonds, etc.) and dividends. If you are the extremely rare person who can trade short term for tremendous gains, you are a rare exception. People who fall into that category will almost all have made so much money already in life that they don't have to do it during retirement! Your odds of learning to do it for the first time in retirement are similar to your odds of winning the PowerBall Lottery. I know people who are trying to beat those odds, and I wish them luck.

You really should not care about the total account balance of a tax-deferred account when you are in draw down phase. Seriously! What you need to do is insure that you have the best (the most reliable and hopefully high) income stream from the account. You are a joint owner of the account with the US IRS. You want to be sure that you don't pay the IRS stupid taxes, only taxes on income you are drawing down. At age 70 you have to take out nearly 4% per year or face further tax penalties for "failure to share with the IRS". Check out Hugh Chou's free calculator http://www.hughchou.org/calc/mdib.cgi for the realties. 1/"Divisor" is the percent of the total account which must be taken out each year to avoid further tax penalties of 50%. At age 71, 1/26.5 = 3.77%. So you need to earn at least 3.77% of your total tax-deferred account per year to avoid a partial liquidation of the asset base (total amount). You cannot assume you will make capital gains greater than that each and every year, and you would have to sell (take the capital gains) on take out. Get it? At age 80 you will have to take out 1/18.7 = 5.35% per year. Consider that. At the moment Vanguard's long term (20 year) US Treasury bond fund is paying 4.68% and their best money market fund is paying 2.21%. Panic!

There are several very important and normally totally misunderstood facts that may help. One is, as I have alluded to, is that the total value of our tax-deferred account isn't as important as the income it generates. If interest rates go up (see below) the value of longer term bond fund or funds goes down, but the income will stay the same or rise because of the higher interest rate. This is key. So we would get the same or maybe even higher interest income even though the total account balance goes down. If the total account balance goes down we have to remove less, according to the IRS formula, but the higher interest rate will make it last longer. (Look at the age 71 versus age 80 withdrawal rates as above.)

The second very important fact (or very strong probability) is that long term interest rates "will" be going up. Long term rates are very close to the lowest they have been for the last 28 years. Twenty eight years is about as long as interest rates decline, based on the past 200 years in the US and Europe. So rates will be going up. This means that when bond funds, or you, have to reinvest in new bonds as the older ones mature or come due and are cashed in, the new rates for bonds will be higher, not lower. This removes one of the worst features of bond investing, namely "reinvestment risk". Your income will be higher, not lower.

Both of these facts, and mandatory US taxes on tax-deferred accounts, explain why you should concentrate on income at this time and forget capital gains in tax-deferred accounts during withdrawals. Concentrate on the cash flow, not the total account balance. These are NOT conclusions that come easily or intuitively for most of us, unless we have been bond traders or fund managers. Think it through several times.

Part Three

I can hear your thoughts clearly. "But what about inflation??????" Depending upon whom you believe and your personal spending patterns, US consumer price inflation now is somewhere between 3% and 8% for the past year. "So I can earn 5% on my tax-deferred accounts and come out short after inflation?" Good question, and the answer is clearly "YES".

This is where the after tax asset base--bank savings accounts, brokerage and mutual fund accounts, etc. come in. You do NOT want capital gains in your tax-deferred accounts that you have to share fully with the IRS. But you do want them in your after tax accounts where capital gains can be taxed as low as 5-15% (until 2010) compared to up to 38% for interest and some dividends. For a retired person the best of all worlds is to make long term capital gains beating inflation (after tax) and add to your income-generating funds with the after tax gains. Whether the gains are from gold or commodities or stocks or commercial real estate, they are likely to beat inflation after taxes--historically they have--and you can put the gains into tax-exempt US municipal funds or other tax-favored funds. So you can add value to your income sources and increase your income during retirement or other voluntary or involuntary drawdowns.

This is obviously, I hope you see, not a miraculous way to make ten million dollars out of a thousand! It is a way to manage what you have saved and invested efficiently to maximize income and minimize taxes. The ten million or one million or half million dollars is what you need to make "before" you retire, in tax-deferred and in after tax accounts. There are two phases at least in an investment life: "making it grow" and "managing withdrawals". The younger you are when you recognize this, the better off your life will be at every stage. No investment magician can create wealth for you if you haven't done what only you can do. The two main things you need to do are to hate debt and to save. Always. There is no other legal way to begin to increase and maximize your assets.

Postscript: I wrote this article yesterday. This morning I saw an article by Rick DeBruhl at AZCentral.com http://www.azcentral.com/arizonarepublic/business/articles/0615biz-debruhl0616.html He learned last week at a National Press Foundation meeting in Washington DC that the average tax-deferred 401K account of Americans from 50-59 years of age is $57,000. At 5% interest that will get you $2850 per year. Oh my!

Closed End Funds in the Current Market

Closed End Funds in the Current Market

US stocks have headed down from SPX 1440, the 80 week moving average, and the 2CS reading in the 70's. I was shaving off stocks into that expected event, and raised some cash. At little more than 2% in a currently dubious currency, cash truly is trash, especially if you can find any reasonable alternatives.

Being retired and living off my assets, **every** investment has to pass two tests for me. The most important test is that it pay a dividend of 4% or better, tax-adjusted. So if a tax-free municipal bond or fund pays 3% and my overall US Federal tax is, say, 30% at the margin, then 3% /.7 = 4.29% and it passes. So I am always looking for good investments that have capital gains potential but which pay me to wait for the capital gains. This was why I bought four US, and one Canadian oil/gas, trusts last year for the major tax-deferred account. They are now paying monthly income at an 8-15% annual rate on original purchase price, and they really didn't make me wait very long.

I gradually began looking at closed end US funds. They are like ETF's in a sense, but are NOT indexes. They are managed, and they include all sorts of asset classes. When interest rates are low, US closed end funds have issued preferred shares or simply borrowed money short term to increase their leverage and their returns. I bought a few state-specific closed end municipal tax-free bond funds last year and two foreign sovereign bond funds which were and are paying 6.5-9%. But I didn't really have a feel for the power of these funds until I happened upon Steven Selengut's website http://www.sancoservices.com/brainwashingbook.htm and then his book: "The Brainwashing of the American Investor".

Normally I am turned off by and ignore people with book titles like that, but fortunately I didn't. Selengut is a money manager in South Carolina, and he has helped me to another quantum leap in my thinking and the practice of investing in retirement. I do disagree with one of his basic ideas, namely that you should never buy a mutual fund. HIs concept, as I understand it and agree with, is that mutual funds add to investing another big layer of expense at my expense, and that they are issuing new shares all the time which is diluitive to net asset value. In the case of many funds and fund managers I would have to agree. They are taking 1-2% of your assets each year and getting rich at your expense for very little or no value added to indexing. And many mutual fund managers become very, very wealthy with a lot of talk but  little value-added justification. Even Hussman! :)

But I spend a good bit of money for subscriptions and data and a lot of time finding funds which are run longer term by good people who either charge extremely little and/or who really deliver the goods. I own some Vanguard funds, as you know, especially municipals and Wellesley Income and the Energy and the Mining funds, which do an excellent job AND charge me tiny expenses. Then there are SGENX and LSBDX and PRWCX and RPSIX and PCRIX and a few others who keep delivering excess value in what they do within tolerable volatility bounds. But there is a lot of truth in Selengut's charge. The mutual fund folks want to keep you locked up, and they don't want you to trade. They problem is that THEY decide what is "excessive trading", not you or I. In my heart of hearts I really would like to buy and hold the ideal portfolio forever through thick and thin. I work at it, And I want to do it. But there are times when you have to make changes, for a host of reasons. Maybe you need extra money for a crisis or a special reward event, or because it's suddenly obvious that XXXXX fund is about to go down the tubes. I have had phone calls and paper work with apparent high school dropouts running "excess trading" desks at major mutual funds that caused me never to buy their funds again. Hey! It's my money, not yours!

Enter closed end funds. They don't care if you trade in and out of their funds ten times a day. They probably would like the increase in volume and liquidity. In case anyone from Vanguard reads this, "Don't worry. You guys will always have my vote for what you do best: very low costs and in highly specialized areas like municipals and special sector and income funds." But for money otherwise at the 2% money market margin, thanks to Chairman Bernanke, closed end funds, which you may not want to own forever, can increase your returns dramatically, and you can get out or in at any time of the day you want with no black stars on the management company's report card.

Selengut is teaching me that there are closed end funds in every asset sector which pay higher than normal yields and with long term gains. His approach is to look for quality: you don't necessarily want the highest yield as you may be buying junk. But you want something better than the average intermediate term bond fund, currently at 3.5-4% at best. He also teaches, mainly in regard to stocks but also in closed end funds, that you only buy funds that are down off their highs of the year, and if you get a really good gain, you cut it back and look for another or for multiple other down-on-their-luck funds. When I first read this I kept saying to myself, "OK, Steve, great idea, but where's the list of good funds?" But then it came to me that he is a money manager, so if I want his list he is going to have to manage my assets. I might do that at some point as he is younger than I am. But I'm still in the saddle for now.

If you have the time and interest you can use ETFConnect.com, Morningstar.com, and FinanceYahoo.com to develop some closed end fund ideas yourself for little or no cost. I will mention some funds that I buy, but I am NOT an investment advisor so these will just be "diary entries". Do read Steve's website and if he is your kind of person, buy his book. The book ranges a bit, and he's taking about his true love in the markets with some passion, but it is an eye opener compared to the usual investment junk advice that we retail peons usually get.

One gem I found on my own and bought today is Eaton Vance Tax Advantaged Global Dividend Opportunities Fund (ETO). This fund is heavily weighted to global inflation beneficiaries which pay decent dividends. Here is a list of recently reported holdings: http://eatonvance.com/mutual_funds/monthlyholdings.php?fund=ETO They are paying a monthly dividend at an annual rate of ~6.5% and are selling at a 10% discount to NAV on conservative 21% leverage. One thing Selengut preaches is that nearly all enterprises at all levels of business use some borrowed money to increase returns, and if done moderately and creatively it's good thing. 6.5% sure beats 2% in a money market fund right now, barring capital losses of course.

May I say once again that I am not an investment advisor, and I do not manage money except that of my family. This is my diary which may or may not be of interest to others. I have no connection with Selengut except as a reader, and no connection with the investment world except as a private investor

 

Stock Market Update

When you are right it always takes a long time  to gain your reward. When you're wrong, you are very wrong and often very quickly. Recently I've been right, and so it has been drawn out, ulcer-genic, and not terribly rewarding.

A lot of the news is more favorable now on the economy and the market. Not, mind you, in the press which is just now getting more bearish. But the press are always negative, especially in an election year when the those who control the press sense that negativism works  for them. On the other hand, some economic analysts of great skill see an economic bottom possibly being made. Market measures of sentiment such as the 2CS show that we are approaching a top. I tend to be early at tops, but I do trust market-based indicators far more than human opinion.

The 80 week moving average on the SPX is still rising and is just under 1440 now, and so is the December low. If SPX can crack through those levels and seem to stay it could be a new ballgame.  If not, I think there is another leg down to crush the bulls.

I have been lightening up in the stock allocation and adding in fixed income via closed end funds which are easy to unload if necessary. I don't really want to be trading, and I am looking at this as "re-balancing" or re-positioning. I haven't yet sold any natural gas trusts.  I haven't sold any physical gold. I have some more cash (paying nearly 0% now) which is available for buying.

As you can tell, I am leaning toward recession, or  at least a prolonged slowdown. Taking some profits and having some cash to buy bargains seems prudent for a retired person. Now if I could only find the perfect portfolio which never needs touching!! I'm 70-80% there.

Ground Glass and Guesses

Ground Glass and Guesses

CXO Advisory quotes Ed Fiedler on predictions: "He who lives by the crystal ball soon learns to eat ground glass." However, several times each year I try to guess what the current market may be saying about the intermediate term investment picture. Currently two market analysts I respect come to the same conclusions by quite different methods. Glenn Neely and Carl Futia both think, at least for the moment, that stocks, TNotes (10 year), gold and the Euro are headed for significant drops. Both think SPX 1430 is a probable high: Neely thinks it will be the high for a long time while Futia thinks the market will correct but go higher over the next year or more.

My own feeling (rightly or wrongly) also has been that 1430 is about tops for stocks, and I had been planning to switch more to bonds. The chart shows some of the reasons why I think 1430 SPX is important:

Most of the talk everywhere I've been is about recession and/or inflation. Recession without inflation would normally be a good time for bonds/notes and for dollars. Since gold looks down to me, inflation is going to slow. The only explanation I can see for all four classes (stocks, TNotes, gold and Euro) going down is a mildly inflationary but continued mild slowdown/recession in the US during which short term rates rise (FED sits on hands). At the same time, the rest of the world slows more and the Euro drops.

Putting it all together, we might do best under such a scenario by putting some of our investment money into the currently most hated of all assets: US dollar short term cash or money market assets. I'm not making any radical changes, just adjustments and profit taking in inflation favored investments. I have had 20% of assets in inflation hedges and have 20% in "deflation" hedges(fixed annuity and cash). Half of the inflation assets are in gold which won't be touched, but I have been and am cutting back on the other half. I think natural gas is a long term bullish story so I might cut back only a bit there if at all. Gold and other mining stocks will get another cut and so will energy stocks apart from the gas income trusts. I will also cut back a bit on "generic" stocks and longer term bond funds.

I do think that bond or "income funds" like LSBDX/LSBRX (Loomis Sayles Bond) and RPSIX (T Rowe Price Spectrum Income) have the smarts to keep the income flowing without taking a hit. I think I've got it right, and in response to Ed Fiedler's remark about eating ground glass, I'll quote Peter Cook's proud saying in Good Evening (in New York, with Dudley Moore): "I have learned so well from my mistakes that I can repeat them exactly!"