Thursday, October 16, 2008

Sunny and Dark at the Same Time

One of the many truths in this world is that an event  can be both positive and negative at the same time, just as the speech of a lawyer may be both true and false depending on how it is perceived by the listener.  The current meltdown is positive from the viewpoint of a Roth IRA conversion.  Since I qualify for it based on taxable income, I just identified the worst performing assets in my regular IRA,  which included all of the mutual funds, and selected them to be transferred into my Roth in a partial conversion.  If events continue to spiral down, I may do a full conversion sometime next year.  With a much lower valuation, the good news is that less taxes will be due as I understand it, and I am certainly no tax nerd.   Another benefit to this sickening decline is that a number of securities of  large U.S. multinationals are being priced today about where there were 10 to 12 years ago.  This is why I always keep cash around in my investment accounts, with about a 25% allocation in cash at the beginning of this year and down to about 20% now after making several bond and bond ETFs during the past three months. 

The Philly Fed index, measuring mid-Atlantic manufacturing actively,  released after my last post was just more fuel for the fire.  The Reuters  headline said this index crashed to a -37.5 from a positive 3.8. Yahoo! Finance
Crash is an appropriate characterization. 

I would anticipate that we will get closer to the lows reached in 2002 for the Dow and the S & P, but those with money will start buying now causing brief rallies off intraday lows.  The Dow was down over 300 points a few minutes ago and is now in a rally mode, down just 120. I can not place any faith in the rally since both the ^VIX  and the ^VXD (DJIA Volatility) have been accelerating up as the averages rallied. 

Many of the manufacturing companies that I have owned and sold at much higher prices are just sinking into a deep cesspool.  Ingersoll Rand (IR) is down over 5% so far today to 18.5 and it was just a few weeks ago that I sold my position at over twice the current price.  Emerson Electric is another fine company that was selling at 58 in June and now is struggling at 32.  These declines are always fast and furious, the elevator is always much faster going down than up.

Sometimes I do wonder, with commissions so low from online brokers, whether a decent trading strategy now for the risk tolerant and non-leveraged/cash rich investor would be to buy 25 or 30 shares in some of the better companies, spacing the investments over time, knowing that no one now really knows how bad it will get or how far anything will fall.  It is true that the bear will overshoot as the bull market has repeatedly done, witness 1999.  No one of course really knows what the future will bring, but it may be time to implement a plan  for an old man with cash, no debt, a high decree of risk tolerance and some knowledge, who has survived the "troubles" or "breaks" many times.

I happened to notice today that the 3 month Treasury bill auction last Monday would give the purchaser about $6 in interest for a $5,000.  That is free money for the U.S. Treasury.  They can pay that $6 and then charge the banks 5% on that money, which sounds good, but wouldn't a bank drool to have that kind of interest rate spread.  With the FDIC guaranteeing deposits up to 250000 now, it would make little sense to me to keep money in treasury bills when an internet bank would be paying almost 3% on a savings account or over 3% on a similar maturity CD.  

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