Sunday, October 26, 2008

Weekend News 10/ 25-26/ 2008

I was struck by a story in the NYT this Saturday about a community in California, Manteca, with a population of around 67,000.  It  has almost 2000 homes in various stages of foreclosure.  Home values have has been cut in half since 2006.  There was a picture of a three year old girl, riding a tricycle, that her mother sold for $3 at a yard sale while she was riding

Aegon said that it was considering tapping the fund established by the Netherlands to aid its financial institutions.  The terms would be similar to the favorable terms accepted recently by ING.  This is primarily relevant to me due to my position in the Aegon floating rate preferred issue, AEB.
There was a brief rally in the ING preferred securities after it accepted funds.

This seemed like an appropriate time to complete a partial transfer of securities from a Regular IRA into a Roth IRA, given the large depreciation in value of those securities this year. This is called a Roth conversion.  There is an income limit of $100,000 and I will have to pay taxes on the amount converted, but the taxes would be less now than they would have been a year ago due to the precipitous fall in values.

I saw a statistic over the weekend that Americans added more mortgage debt during the last six years than during the entire life of the mortgage market. See George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means, at p.83.  In 2006, 33% of new mortgages were either subprime or ALT-A.   

There was a story in the WSJ that Calpers, the largest public pension fund in the U.S., is having to sell stock to meet its cash distribution obligations.  It has about a 63% allocation to world stocks and has seen a few land investments go bad (including a 1 billion dollar investment in a land development company called LandSource which has filed for bankruptcy).  Distributions from its investments in hedge funds has also dried up. MarketWatch

Kuwait had to give financial aid to one of its large banks after it defaulted on a derivative contract.

60 minutes had a story that Congress was responsible for changing the law in 2000 that permitted the market in credit default swaps and to prohibit regulation of them.  CBS NewsThis was part of the overall trend of allowing Wall Street to regulate itself.  Congress now acts surprised that this law provided the fuel for the economic meltdown.  AIG certainly blew up selling credit default insurance and is almost gone through all the bailout money due to its improvident, incompetent and irresponsible participation in this market. Yahoo! see also my prior discussion at AIG: STUPID IS JUST TOO GENEROUS A TERM TO DESCRIBE THEM

There was also an article in the WSJ that the refiners were being hurt now due to a fall in gasoline prices being faster than the fall in crude prices.  This article has caused me to postpone any additions to the two recent refiner purchases.Refiners: ALJ and VLO, 
This new position was also discussed near the end of this post- SARAH and the Cook Inlet Beluga Whales/WALGREENS AND REFINERS

Part of the strength in the Japanese Yen recently has to do with the unwinding of the carry trade by hedge funds, where they borrowed money in Yen (since rates are so low in Japan) to invest in higher yielding assets. Some invested in the higher yielding Australian dollar. The Asia  As these trades are unwound, they would sell Aussie dollars, for example, causing this currency to fall and then repay the loan taken out in Japanese Yen, causing a spike in the value of Yen as large amounts of funds have to be used to buy Yen in order to unwind this carry trade.   Last Friday, the currency ETF for the Australian dollar (FXA) fell 6.51% to 62.37 down from 97.5 in August, whereas the currency ETF for the YEN (FXY)  rose 2.28% last Friday to 105.1, up from around 90 in mid-August. Part of this is due to the perception of the Yen as a safe haven currency in times of turmoil.

The Loomis Sayles Bond Retail Fund (LSBRX) continued its pathetic performance for the year since my last discussion about itStocks & Politics: Buy High & Sell Low /Retrospective on the Good & Bad, now having lost over 27% for the year.  I buy bonds funds to provide stability and ballast  in times of stock market turmoil.  A brain dead total bond index fund charging a lot less than Loomis Sayles would have been down only 1%.  Is Loomis going to give me a 37% outperformance versus the index anytime soon to make up for this year's variance?   I am actually positive this year with my individual bond purchases. Why I am more competent than the so-called professionals?   This fund has just totally failed in its purpose and will have to be fired for its brazen incompetence.  I simply can not continue justifying holding it, even if I knew that  it would came back and slightly outperformed the index in the future.  It has failed miserably in its primary mission.  It is not hard to discern why by looking at its last semi-annual report.    I will replace it with one of the low expense ratio bond ETFs.  Unfortunately, I will need to hold this fund until early next year due to a holding period restriction with my brokerage company.  I do not want to pay a penalty for selling any of the shares on top of the losses already suffered with this disastrous bond fund investment.   I did just stop the dividend reinvestment in anticipation of selling all shares in the Loomis Sayles Retail bond fund at a significant loss.   All of the shares bought with dividends are likewise well under water.

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