Michael Lewis was interviewed yesterday on CNBC. Here are links to two videos: CNBC.com and CNBC.com
I do believe Greece is hopeless and undeserving of any bailout. It was a huge mistake to admit that country into the EU. Those opinions were reinforced when I read the material about Greece in Michael Lewis' new book "Boomerang". An excerpt from the book about Greece appeared in Vanity Fair. When a rational person reads that article, it is impossible to have any confidence in a rescue package for Greece. It is important to remember that the Greece saga started when the new Socialist government came into power and notified the EU that the prior government had committed fraud by massively underreporting its debt as a percentage of GDP. (see 30 page report at eurostat.ec .PDF)
I do believe Greece is hopeless and undeserving of any bailout. It was a huge mistake to admit that country into the EU. Those opinions were reinforced when I read the material about Greece in Michael Lewis' new book "Boomerang". An excerpt from the book about Greece appeared in Vanity Fair. When a rational person reads that article, it is impossible to have any confidence in a rescue package for Greece. It is important to remember that the Greece saga started when the new Socialist government came into power and notified the EU that the prior government had committed fraud by massively underreporting its debt as a percentage of GDP. (see 30 page report at eurostat.ec .PDF)
Lewis provides some examples of the Greek entitlement state. Greece's national railroad has annual revenues of €100 million and €300 million in annual wage costs plus another €300 million in operating expenses. The average railroad worker makes €65,000 per year.
The average government job pays about 3 times the average private job. The NYT reported in early 2010 that civil servant salaries and pensions take up 51% of the Greek government budget. Greece-Entitlement Society Run Amok (February 2010 Post); Greece-Citizens in Aggressive Denial (May 2010 Post). The state is treated like a Piñata to be rob by the people, as noted by Lewis in his CNBC video yesterday. Tax collectors in Greece were fired for collecting taxes, now there are Germans in Greece trying to collect taxes owed to the Greek state. CNBC.com
The average government job pays about 3 times the average private job. The NYT reported in early 2010 that civil servant salaries and pensions take up 51% of the Greek government budget. Greece-Entitlement Society Run Amok (February 2010 Post); Greece-Citizens in Aggressive Denial (May 2010 Post). The state is treated like a Piñata to be rob by the people, as noted by Lewis in his CNBC video yesterday. Tax collectors in Greece were fired for collecting taxes, now there are Germans in Greece trying to collect taxes owed to the Greek state. CNBC.com
And, given the extensive corruption, waste and even theft, many public employees make even more then their paychecks. Lewis points out Greeks view it as necessary to bribe government employees in order to receive a service. The WSJ published a story last year summarizing a Brookings study, which found that bribery, corruption and cronyism cost the Greek state €20 billion a year.
Those government workers in arduous jobs can retire with generous pensions at 55 for men and 50 for woman. And what is arduous to the Greeks, just about every occupation imaginable, more than 600 according to Lewis.
The Greek school system, ones of the lowest ranked in Europe, employs four times as many teachers as the highest ranked system in Finland. And, the teaching is so bad that Greeks hire tudors for their children.
This entitlement state is supported by borrowed money. In short, that money has been stolen. Is there any rational basis for believing the Greeks will come to their senses after Europe bails them out or is good money being thrown after bad? Without brain transplants for most of the population, the answer seems clear to me.
Greece reported over the weekend that its new budget falls short of hitting the deficits targets set forth by the EU and the IMF for their respective bailout packages. Can there be any rational doubt that those numbers would prove to optimistic and Greece will fail to meet even those numbers? The EU basically told Greece yesterday that it needed to do more before it would receive the next €8 billion in aid. Reuters NYT WSJ
Greece reported over the weekend that its new budget falls short of hitting the deficits targets set forth by the EU and the IMF for their respective bailout packages. Can there be any rational doubt that those numbers would prove to optimistic and Greece will fail to meet even those numbers? The EU basically told Greece yesterday that it needed to do more before it would receive the next €8 billion in aid. Reuters NYT WSJ
The U.S. government reported Friday that personal income fell .1% in August. Real disposable income decreased .3%, an increase from -.2% registered in July. The savings rate was 4.5%, down from 4.7% in July. News Release: Personal Income and Outlays, August 2011
Consumer prices in the 17 nation Eurozone rose 3% in August. This kind of data can be found at Eurostat, the statistical office for the European Union: eurostat.ec. PDF In another release, Eurostat says that the EU 17 unemployment rate is at 10%. eurostat.ec.PDF The Greek unemployment rate was at 16.7% and Spain was even higher at 21.2%.
The German Federal Statistical Office said that August retail sales in Germany fell a seasonally adjusted 2.9% compared to July.
Ingersoll Rand reduced its estimate for third quarter and 2001 results due to lower than expected growth.
According to Reuters, George Soros believes that the financial markets are taking the world into a depression and he offers some advice for the European leaders.
A new recession is unavoidable according to ECRI's Lakshman Achuthan. He said that things are going to get a lot worse. The best case is a mild recession. And, he said that it could get worse with a shock like the Lehman failure. The U.S. is in a recession now or will be later this year. According to him, it is a done deal. Daily Ticker CNBC VIDEO I do not have his certainty but believe that his conclusions are more likely than not. Caution is the appropriate word here at HQ now.
The September ISM index was reported at 51.6.
Bloomberg reported yesterday that credit default prices on Goldman Sachs and Morgan Stanley debt increased to levels last seen in the weeks following the Lehman failure.
The MACD technical indicator for the S & P 500 has flashed a sell signal. CNBC.com The prior last sell signal was made by this indicator in December 2007. It gave a buy signal in September 2009.
1. Formation of a Phase 2 Unstable VIX Pattern: In a previous post, I referenced a probable formation of the Unstable Vix Pattern, Phase 2. Probable Formation Phase 2-Unstable Vix Pattern (8/9/11 Post) The recent action in the VIX confirms the formation of that pattern. The ^VIX rose 5.84% yesterday to close at 45.57. The more volatile index for the Russell 2000, ^RVX, closed at 57.57. This is what I would expect RVX to do. Small Caps and RVX model (January 1, 2009 Post) The Nasdaq 100 volatility index, ^VXN, closed at 46.56.
The Phase 2 pattern is extremely dangerous for investors. With increases in volatility, opportunities develop for traders and long term investors who are able to hold indefinitely, as prices decline to compensate for perceptions that risks have increased for equities. Vix Asset Allocation Model Explained Simply If today is another down day, I will probably sell my last remaining double short stock ETF being used as a hedge. Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (7/28/11 Post); VIX and Trading Rules in An Unstable Vix Pattern Within the Context of a Long Term Secular Bear Market (8/5/11 Post); When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks (May 15, 2009 Post).
I have already reduced my stock allocation to the lowest level possible under my allocation scheme. Since the CBOE started compiling the VIX data, there has been only one other Phase 2 formation in the Unstable Vix Pattern, and that was in September 2008. Prior to the VIX data, which starts in 1990, there was a volatility index on the S & P 100 which showed a Phase 2 pattern formation in 1987. Parallels to VXO 1987-1988 (May 2009 Post). The VIX has been in an Unstable Vix Pattern since the Trigger Event in August 2007. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Multiple Confirmations of VIX Model-Canary in a Coal Mine (May 2009 Post).
For me I use this signal as a confirmation of my portfolio positioning, that is, an allocation consistent with a cyclical bear market within the context of a long term secular bear market. It is further a cautionary signal, a warning of at least a potential significant decline in stocks. The Roller Coaster Ride of the Long Term Secular Bear Market; Item # 7 Historical VIX Patterns The market is particularly vulnerable now to an external shock and a waterfall decline.
The most important trading signals given by the Vix Asset Model are the Trigger Event (August 2007, October 1997, April 1987) and the Green Light signal. The last Green Light signal was given in March 2004 (More on VIX AND ASSET ALLOCATION) and was terminated with the August 2007 Trigger Event. During Unstable Vix Pattern periods, a hyper active trading strategy is employed with constant shifts in asset allocation. The prior Green Light signal was given in March 1991 and lasted until the October 1997 Trigger Event which also marks the start of the current long term bear market in my opinion. Dating the Start of the Current Long Term Secular Bear Market (May 2010)
The prior Unstable Vix Pattern period lasted from October 1997 to March 2004. There will be a lot of up and down movement during those periods, but nothing productive is likely to originate from a buy and hold strategy. The S & P 500 closed at 983.12 on October 7, 1997. ^GSPC Historical Prices | S&P 500 The close on March 9, 2004, with the Unstable VIX Pattern having been formed with continuous movement below 20 over 3 months, was at 1140.58. The Trigger Event occurred in late October and early November 1997: VIX Historical Prices The Trigger Event for the most recent Unstable VIX Pattern occurred in August 2007, VIX Historical, which was confirmed by the VIX movement in mid-November 2007 and again in January 2008.
Possibly the first references to using the VIX as a timing indicator for stock allocation, other than posts contained throughout this blog since inception in October 2008, were made by Mark Hulbert in his MarketWatch column yesterday and in an earlier column. MarketWatch He refers to a simple model of going into cash whenever the VIX exceeds 20, and then back into stocks when it falls below 20.
Since Hulbert apparently has some interest in using the VIX as an asset allocation tool, I sent him an email with links to my posts on the subject last night.
2. Sold 100 AEB at $18.42 Last Friday (see Disclaimer): I no longer want any exposure to European hybrids. This is in part based on the fear of losing my significant percentage profit in these AEB shares. I simply do not view the risk of losing some of that profit to be worth the income paid by this security. The profit was equal to over 11 years of income at the 4% minimum payment. This is a snapshot of my realized gain for the shares sold last Friday:
I also liquidated earlier in September my 100 shares held in the ROTH IRA: Sold 100 AEB at $18.2635 ROTH IRA-Average Total Cost $6.05 (see snapshot in that post).
AEB closed at $17.64 in trading yesterday.
Aegon Hybrids: Gateway Post
3. Bought 200 of the Bond CEF ACG at $7.98 last Friday (see Disclaimer): This was another fear based purchase. I now own 400 shares of this bond CEF. The prior purchase was in early August 2011: Bought 200 ACG at 7.85
ACG released last week its monthly portfolio update. In that release, the fund shows leverage of 44.36%, an average maturity of 10.09 years, and an effective duration of 6.1 years. ACG reported a 73.71% weighting in AAA rated securities with a high concentration in U.S. treasuries.
Generally, when a bond fund reports credit quality, it will use the highest rating of the main rating agencies. So, even though S & P downgraded U.S. debt a notch below AAA, Moody's still has the debt rated AAA as does Fitch.
The AllianceBernstein Income Fund recently declared its regular 4 cent per share monthly distribution. The ex date is October 5, 2011.
When I made my last purchase in August, I noted that Morningstar rated the fund 3 stars. It is currently rated 4 stars.
I have bought and sold this fund in the past: Bought 200 ACG at $8.12 in Roth In May 2010 Added 400 ACG at 7.85 in May 2010 Sold 200 ACG at 8.35 in August 2010 SOLD 200 ACG 8.45 in August 2010 Bought 300 of the Bond CEF ACG at 7.63 in April 2011 Sold 300 of the Bond CEF ACG at 7.82 in May 2011.
I regard this position as a trade only. I am not a long term investor in ACG shares.
Fund website link: AllianceBernstein Income Fund, Inc. (formerly ACM Income Fund, Inc.)
Last SEC filed shareholder report: AllianceBernstein Income Fund, Inc.
As of last Friday, the fund reported a net asset value per share of $8.92
ACG closed at $8 in trading yesterday. The net asset value per share increased three cents on Monday. Based on yesterday's closing price, and the NAV per share of $8.95, the discount to NAV at that time was -10.61.
According to Reuters, George Soros believes that the financial markets are taking the world into a depression and he offers some advice for the European leaders.
A new recession is unavoidable according to ECRI's Lakshman Achuthan. He said that things are going to get a lot worse. The best case is a mild recession. And, he said that it could get worse with a shock like the Lehman failure. The U.S. is in a recession now or will be later this year. According to him, it is a done deal. Daily Ticker CNBC VIDEO I do not have his certainty but believe that his conclusions are more likely than not. Caution is the appropriate word here at HQ now.
The September ISM index was reported at 51.6.
Bloomberg reported yesterday that credit default prices on Goldman Sachs and Morgan Stanley debt increased to levels last seen in the weeks following the Lehman failure.
The MACD technical indicator for the S & P 500 has flashed a sell signal. CNBC.com The prior last sell signal was made by this indicator in December 2007. It gave a buy signal in September 2009.
1. Formation of a Phase 2 Unstable VIX Pattern: In a previous post, I referenced a probable formation of the Unstable Vix Pattern, Phase 2. Probable Formation Phase 2-Unstable Vix Pattern (8/9/11 Post) The recent action in the VIX confirms the formation of that pattern. The ^VIX rose 5.84% yesterday to close at 45.57. The more volatile index for the Russell 2000, ^RVX, closed at 57.57. This is what I would expect RVX to do. Small Caps and RVX model (January 1, 2009 Post) The Nasdaq 100 volatility index, ^VXN, closed at 46.56.
The Phase 2 pattern is extremely dangerous for investors. With increases in volatility, opportunities develop for traders and long term investors who are able to hold indefinitely, as prices decline to compensate for perceptions that risks have increased for equities. Vix Asset Allocation Model Explained Simply If today is another down day, I will probably sell my last remaining double short stock ETF being used as a hedge. Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (7/28/11 Post); VIX and Trading Rules in An Unstable Vix Pattern Within the Context of a Long Term Secular Bear Market (8/5/11 Post); When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks (May 15, 2009 Post).
I have already reduced my stock allocation to the lowest level possible under my allocation scheme. Since the CBOE started compiling the VIX data, there has been only one other Phase 2 formation in the Unstable Vix Pattern, and that was in September 2008. Prior to the VIX data, which starts in 1990, there was a volatility index on the S & P 100 which showed a Phase 2 pattern formation in 1987. Parallels to VXO 1987-1988 (May 2009 Post). The VIX has been in an Unstable Vix Pattern since the Trigger Event in August 2007. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Multiple Confirmations of VIX Model-Canary in a Coal Mine (May 2009 Post).
For me I use this signal as a confirmation of my portfolio positioning, that is, an allocation consistent with a cyclical bear market within the context of a long term secular bear market. It is further a cautionary signal, a warning of at least a potential significant decline in stocks. The Roller Coaster Ride of the Long Term Secular Bear Market; Item # 7 Historical VIX Patterns The market is particularly vulnerable now to an external shock and a waterfall decline.
The most important trading signals given by the Vix Asset Model are the Trigger Event (August 2007, October 1997, April 1987) and the Green Light signal. The last Green Light signal was given in March 2004 (More on VIX AND ASSET ALLOCATION) and was terminated with the August 2007 Trigger Event. During Unstable Vix Pattern periods, a hyper active trading strategy is employed with constant shifts in asset allocation. The prior Green Light signal was given in March 1991 and lasted until the October 1997 Trigger Event which also marks the start of the current long term bear market in my opinion. Dating the Start of the Current Long Term Secular Bear Market (May 2010)
The prior Unstable Vix Pattern period lasted from October 1997 to March 2004. There will be a lot of up and down movement during those periods, but nothing productive is likely to originate from a buy and hold strategy. The S & P 500 closed at 983.12 on October 7, 1997. ^GSPC Historical Prices | S&P 500 The close on March 9, 2004, with the Unstable VIX Pattern having been formed with continuous movement below 20 over 3 months, was at 1140.58. The Trigger Event occurred in late October and early November 1997: VIX Historical Prices The Trigger Event for the most recent Unstable VIX Pattern occurred in August 2007, VIX Historical, which was confirmed by the VIX movement in mid-November 2007 and again in January 2008.
Possibly the first references to using the VIX as a timing indicator for stock allocation, other than posts contained throughout this blog since inception in October 2008, were made by Mark Hulbert in his MarketWatch column yesterday and in an earlier column. MarketWatch He refers to a simple model of going into cash whenever the VIX exceeds 20, and then back into stocks when it falls below 20.
Since Hulbert apparently has some interest in using the VIX as an asset allocation tool, I sent him an email with links to my posts on the subject last night.
2. Sold 100 AEB at $18.42 Last Friday (see Disclaimer): I no longer want any exposure to European hybrids. This is in part based on the fear of losing my significant percentage profit in these AEB shares. I simply do not view the risk of losing some of that profit to be worth the income paid by this security. The profit was equal to over 11 years of income at the 4% minimum payment. This is a snapshot of my realized gain for the shares sold last Friday:
 |
| 2011 Taxable Account LT Realized Gain 100 AEB =+$1,142.51 |
I also liquidated earlier in September my 100 shares held in the ROTH IRA: Sold 100 AEB at $18.2635 ROTH IRA-Average Total Cost $6.05 (see snapshot in that post).
AEB closed at $17.64 in trading yesterday.
Aegon Hybrids: Gateway Post
3. Bought 200 of the Bond CEF ACG at $7.98 last Friday (see Disclaimer): This was another fear based purchase. I now own 400 shares of this bond CEF. The prior purchase was in early August 2011: Bought 200 ACG at 7.85
ACG released last week its monthly portfolio update. In that release, the fund shows leverage of 44.36%, an average maturity of 10.09 years, and an effective duration of 6.1 years. ACG reported a 73.71% weighting in AAA rated securities with a high concentration in U.S. treasuries.
Generally, when a bond fund reports credit quality, it will use the highest rating of the main rating agencies. So, even though S & P downgraded U.S. debt a notch below AAA, Moody's still has the debt rated AAA as does Fitch.
The AllianceBernstein Income Fund recently declared its regular 4 cent per share monthly distribution. The ex date is October 5, 2011.
When I made my last purchase in August, I noted that Morningstar rated the fund 3 stars. It is currently rated 4 stars.
I have bought and sold this fund in the past: Bought 200 ACG at $8.12 in Roth In May 2010 Added 400 ACG at 7.85 in May 2010 Sold 200 ACG at 8.35 in August 2010 SOLD 200 ACG 8.45 in August 2010 Bought 300 of the Bond CEF ACG at 7.63 in April 2011 Sold 300 of the Bond CEF ACG at 7.82 in May 2011.
I regard this position as a trade only. I am not a long term investor in ACG shares.
Fund website link: AllianceBernstein Income Fund, Inc. (formerly ACM Income Fund, Inc.)
Last SEC filed shareholder report: AllianceBernstein Income Fund, Inc.
As of last Friday, the fund reported a net asset value per share of $8.92
ACG closed at $8 in trading yesterday. The net asset value per share increased three cents on Monday. Based on yesterday's closing price, and the NAV per share of $8.95, the discount to NAV at that time was -10.61.
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