1. U.S. DOLLAR: The U.S. Dollar continued its decline yesterday with the Dollar Index near its 52 week low. DXY The European Central Bank president, Jean-Claude Trichet, said yesterday that a "strong dollar is extremely important in the given circumstances." The weak dollar is a positive for U.S. manufacturers and multinationals, while it is probably slowing the recovery of economies dependent on exports like Japan. Trichet also said the euro zone is showing signs of stability.
2. Sold 50 JZH at 21.5 (See Disclaimer): I continued to pare the trust certificate JZH, which contains a senior bond from Prudential maturing in 2033, by selling 50 shares yesterday at $21.5. This TC has a coupon of 6%. I now have a larger position in the Prudential senior bond maturing in 2018, PFK, that pays interest monthly based on a 2.4% spread over CPI. I am just more comfortable holding the shorter duration bond whose interest payments are tied to CPI and selling at a greater discount to par value.
However, that decision was made by the LB whose side of the mind was infected for the entire day with the song "Breaking up Is Hard to Do", which it kept singing ad nauseum, mostly off key with numerous word changes, to the great consternation of the RB and Headknokcer, after the original version of the song was heard as background music in an Allstate commercial. Who can think clearly with that kind of brain noise repeating itself over and over again? I am going to start blaming Neal Sedaka for everything now.
3. Sold 100 RJZ at $9 (see disclaimer): RJZ is an ETN linked to the Rogers International Commodity Index for metals. I bought 200 shares at $6.96 in May and sold 1/2 of the position yesterday to take some profits. Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS
I mentioned in a prior post that I would be switching some funds into agricultural commodities and out of the metals. Bought RJA Ninety-Nine percent of my metal position is in a lock box at the bank. I was tempted to sell gold until I heard Jim Rogers say on Wednesday, in an interview with Maria, that he would hold onto gold. He said it would be "much higher in 10 years" CNBC.com I have never sold any, and still have my first purchase made when I was 13. CPI and CPI Floaters-OSM/CDs v Treasury Bills in Dynamic Asset Allocation/ Numb to bad news That five dollar gold piece, purchased about 45 years ago, looks exactly the same, and I cannot say the same for its owner.
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| 2009 RJZ 100 Shares +$188.02 |
One mutual fund that I did not pare before or during the bear market, and even added to it during the last bear cycle, has a constant and significant exposure to gold and silver bullion: PRPFX - Fund Top 25 holdings MSN Money Comments on Barron's Roundtable I am referring to the Permanent Portfolio fund, currently rated five stars by Morningstar: Snapshot: PRPFX: The fund does maintain a significant exposure to short term treasury securities that have not helped NAV growth recently. The fund was down just 8.4% in 2008: PRPFX - Fund returns - MSN Money The fund has been helped by the bull market in gold and silver, and would be hurt by a reversal of that trend since it maintains a constant allocation to those precious metals. This is a link to this fund's last shareholder report filed with the SEC: Permanent Portfolio Family of Funds, Inc. Semi-Annual Report Form N-CSR-July 31, 2009
4. Cramer Hot on Hertz (own DKR only): Cramer has apparently discovered the car rental companies after Avis and Dollar Thrify have risen from the ashes since early March, rising over 3000% or so. He believes that Hertz presents the best opportunity of the three now, primarily due to their larger percentage ownership of vehicles which are rising in value now. I have no interest in the common and am just holding for now my small positon in DKR bought at $6.45. Hertz Bond Information in One Post
5. Microsoft (owned): Walt Mossberg had a favorable review of Windows 7 in his WSJ column yesterday. He calls it the best Windows system yet and he "heartily" recommends it to the average consumer.
6. Corporate Bonds Are Expensive: I would agree with the observation made by Brett Arends that bonds are expensive and risky now. WSJ.com As to his recommendations of buying buy-write stock funds as an alternative to bonds, I already own several of those, including ETW, EOI, and IAE. They do generate good income but have not provided that much protection in the stock market's earlier meltdown as I discussed in several prior blogs. CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied
I have been attempting to hedge the interest rate and inflation risk by buying bonds and equity preferred stocks that pay the greater of a guarantee or some percentage over a short term rate like the 3 month Libor or 3 month Treasury Bill, or the bonds that float based on a spread to the CPI like PFK and OSM. Of the CPI corporate bond floaters, I prefer PFK simply based solely on the credit risk issue compared to the Sallie Mae CPI floaters, OSM and ISM, which I also own. I would agree with Arends that the TIPs have become expensive based on their current small real yields. I doubt that I will participate in another ten year auction until the coupon exceeds 2%.
7. This Time Is Different: I started to read last night the book written by Carmen Reinhart and Kenneth S Rogoff, two professors of economics. The authors delve into the common origin of eight centuries of financial crises. In the preface, the authors state that the common theme of financial crises over the past eight centuries is excessive debt accumulation. I could not agree more with their statement that debt fueled booms create a "false affirmation" of government's policies or a companies ability to earn profits, or even a country's standard of living. The growth of excessive debt creates the risk, and makes the borrower more vulnerable to shocks, particularly when the debt is short term and in constant need of rollover. I have previously maintained that the main factor behind the growth in the U.S. during the first years of the new century was the ever increasing expansion of debt at all levels, particularly by the American consumer, but also by investment banks and other companies, along with governments at every level. (see, e.g.: /What Will Produce Growth after the Age of Leverage? 2004 SEC Rule Change More Meanderings on Corporate Tax Rates & THE Multitude of Factors Impacting Growth & Item No 2: LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK)
8. Pinnacle West (owned): PNW is one of my electric utility holdings. J P Morgan upgraded PNW from underweight to neutral, and raised its target to $33 from $28, based on its view that a proposed settlement with the Arizona Public Service Commission would remove uncertainty and boost profits in 2010. As of the close yesterday, PNW's stock price was at $32.8, twenty cents below the new target and almost $4 above the old one. This says something about how analysts are frequently in catch up mode with their ratings and price targets, both up or down. This proposed settlement was discussed by PNW in the last earnings release from 8/4/09: Pinnacle West
While it is hard to argue with the idea that financial crises are caused by the accumulation of too much debt, the corrollary, that debt has historically been an excellent stimulus for expansion and growth, is also pretty obvious.
ReplyDeleteThe question is, what is the alternative to debt as a lubricant for the engines of growth? And how to control its accumulation so it doesn't cause periodic train wrecks? Or is this even possible? Maybe we should just get used to it.
Cathie: I would expect the professors to define what is meant by excessive debt in their book. I can not subject the RB to more than a few pages of this kind of material a day, without hearing squealing from it.
ReplyDeleteI, however, believe that excessive consumer debt can be measured using a number of criteria, such as debt as a percentage of disposal income. The 133% figure hit in 2008 was clearly excessive, whereas 50 to 70% would be prudent and reasonable. At some point, the growth financed by leverage is a mirage, unsustainable and will cause more harm than any possible benefit. Sure, the leverage boom in the 2002 to 2007 period produced a spurt in growth, and brought the world to a near Great Depression, losing more in the end than anything gained by that debt fueled growth.
40 to 1 debt to equity in a financial institution is excessive, whereas the prior rule in effect before the 2004 rule change of 12 to 1 debt to equity was prudent and reasonable, that is, enough debt to finance a reasonable pace of expansion.
Mortgage payments of more than 38% of the borrower's pre-tax income is excessive leverage, as shown by recent experience, and payments less than 32% would be prudent.
A savings rate of 4 to 8%, rather than a negative number, would be reasonable, to give families a cushion for hard times.
So, if everyone would allow me to make these decisions, I could get it working just fine. But since the debt fueled crazes have a 800+ year history, it is unlikely to ever change since it is part of human nature. And, if I can make a somewhat cynical observation based on decades of personal observation, most people learn nothing from current experience and recent history, let alone the lessons of the history since Adam and Eve walked with the dinosaurs. Yes, that sounds strange to many but it is true according to a creationist museum in Kentucky: http://www.nytimes.com/2007/05/24/arts/24crea.html