Sunday, November 30, 2008


I have discussed several times the Trust Certificates containing the senior AT & T bond, maturing in 2031.  The FINRA web site has trade data for bonds accessible for free by an individual investor.  The CUSIP is 001957BD0 and the symbol is T.JH, with the last price shown via this link.   FINRA - Investor Information - Market Data - Bonds - Bond Detail This site also contains a 1 year chart of the trades.  Another one that I mentioned earlier today was JZH and the underlying bond trades can be found at the FINRA site at this link. FINRA - Investor Information - Market Data - Bonds - Bond Detail (symbol PRU.GS/CUSIP 74432QAC9)  I would just highlight that these corporate bonds just fell a great deal in October as the stock market crashed and it is notable to me how well they were doing before the stock market entered phase 2 of the bear. This is the link to the Verizon bond contained in PJL and XFL TCs, FINRA - Investor Information - Market Data - Bonds - Bond Detail This is the link to the Duke Capital bond contained in JBI. FINRA - Investor Information - Market Data - Bonds - Bond Detail (SYMBOL DUK.GV/ CUSIP 26439RAK2) Lastly, I also mentioned an AON junior deferrable interest bond contained in the TC KTN, FINRA - Investor Information - Market Data - Bonds - Bond Detail (SYMBOL AOC.GA/ CUSIP 037388AE5)

The FINRA site is a good one for an individual to check individual bond prices and to see the the trading history for the bond.  The charts are most instructive to me, showing an across the board major disruption in the corporate bond market causing a plunge in prices and a rise in yields coterminous with the stock market dive in the September thru November time frame. 

Long Term Bonds in Trust Certificate Form/Grantor Trust Legal Opinion

After coming to a realization late yesterday that I had been sitting on too much cash, and being eternally thankful of my blissful ignorance on that point until now, I started to actually contemplate whether stocks or corporate bonds would be a better use of that cash now. I  was not thinking about an index fund for the total bond market that might pay me a tad over 4% but the long bonds in TC form.  Alan Abelson mentioned in his column in this week's Barrons that he was positive, at least to the extent that he is capable of enjoying that feeling, on AT & T common which I do not own but have considered buying back after selling in the high 30s. The perma bear then mentioned that an income investor might be drawn to AT & T bonds yielding up to 7%.  One of the TCs that I have discussed is JZJ, which contains a senior bond of AT  & T currently yielding 9.45% at its closing price of  $16.86 last Friday. JZJ Stock Quote

I have also mentioned that this bond has enhancement features in the event of a debt downgrade, .25% for each notch as I understand it, and I further discussed the possibility of a call and redemption at the $25 par value as soon as the corporate credit market stabilizes. I own JZJ and JZE, both containing the same AT & T senior bond, but JZJ is a tad better in that the guarantee is higher at 6.375% versus 6% for JZE. Since the debt has been upgraded since the original issuance of these TCs, the rate has floated down to the minimum guarantee for both of these TCs. Both just went ex interest so I may add to one or the other based on price. It makes no sense for JZE to be selling at 17.75 and JZJ at 16.86, since both are identical except for the better guarantee provided by JZJ, which would rationally call for a higher price rather than a lower one, and the date for the first call option. JZJ is callable now by the owner of the call warrant.

Relationships: Trust Certificates for the Same ATT Bond
I mentioned in the JZE post referenced above that I had a limit order hit at 12.5 for that security. This doubled my guaranteed rate to 12% for the life of the bond, maybe higher in the event of debt downgrades. If it was not called and the underlying bond was permitted to mature in 2031, I would realize another 4% per year annualized representing the spread between my cost and par amortized over the life of the bond.  That is what started me to think about this issue more.  I will likely live to 2031. Is a stock likely to give me over 16% annualized every year for the next 23 years? This is a eureka moment.  The answer is no way.  What is my risk if I held to maturity?  One answer is inflation risk but that risk is eliminated except for what I and others would call lost opportunity cost by holding until maturity. That is, if the value of long bonds plummet as they did in the late 1970s and early 1980s, I lose the opportunity of buying long bonds at cheaper rates and higher yields that I would be receiving for the AT & T  bond. I will accept that risk. The second risk has to do with credit. Will AT & T go bankrupt before 2031? This is just not knowable now but I doubt it. If it looks like it is starting to go down the path of GM, and assuming my mental condition is still more or less still functioning, I could just sell it then. After thinking some more about this issue, I am going to increase my long bond positions as opportunities present themselves. 

Another one that I might add to is the Prudential bond in the TC JZH.  I bought some at 9.75 and I will add some more at some point. JZH Stock Quote I discussed this one in a prior post. TRUST CERTIFICATE JZH: PRUDENTIAL SENIOR BOND I gave a link to the prospectus in that post. I found out a few minutes ago that the link works fine using safari on one of my IMACs but a computer using Windows and Internet Explorer gets the same document with a lot of lines through it. Weird. This one matures in 2033 and yields 14.35% at the last price of 10.35, plus around 5%+ annualized from the amortized spread assuming payment at maturity. Pru may be a more questionable long term hold to 2033 for me but again I am starting to alter my thinking some. I was thinking about trading this one when the market recovered and people became more comfortable with life insurance companies. Now, I am saying to myself, and possibly I may even pay attention, that there is no way that stocks will give me a 20% annualized return for 25 years.

A few other investment grade bonds, providing similar yields, fall into the same category as JZH, JZE and JZJ but I have not discussed all of them.  Others discussed would include the AON TCs, and the Duke JBI at lower prices than today  TRUST CERTIFICATES JBI DUKE .

But, the real question mark is do I sell a more troubling senior bond like the one from Phoenix Insurance, PFX, selling at around 7 and change, even if it jumped to 15 sometime next year or hold, hoping that the company survives until maturity in 24 years and pays me the $25 par value plus 24% per year in current yield based on the today's price. PFX Stock Quote - Phoenix Cos Inc New Stock Quote - PFX Quote - PFX Stock Price That is a much  harder question to answer. My tentative answer is to buy, possibly on further weakness, another 100 shares and hold 200 until it makes it back to 15 or so, then sell 1/2, and then keep the other 100 until maturity, playing with the house's money, one of my favorite terms along with the phrase "double down" when the dealer has a four showing and I have 11. If it looks like PNX is going to sink into oblivion, then I take the loss on the 200 and say bad boy-don't do that again. I have several like this one and I have only mentioned PFX. Industrial REITS; WB, TARP & LNC/PNX SENIOR BOND (PFX)

One facet of Trust Certificates that I have not mentioned is the legal opinion which is contained in all of them. They all say basically the same thing.  It is the opinion of counsel that the trust is a grantor trust that is not subject to taxation at the corporate level but this is not free of doubt. I do not know what that means. The individual holding the trust certificate is taxed on the interest received of course and it will be included on the 1099 received from the broker. I suspect, but do not know, that if there was any problem with the legal opinion contained in the prospectus, it would have already come up. Some, who know me, will say that I spent a career reading crap more complicated than this document and I would agree with that assessment. But I have no background in grantor trust tax issues and I am not about to spend one second trying to acquire one. A typical statement is found on page 32 of the prospectus for JZH referenced above.

After posting this one, I thought I would add a personal comment. I said that I would likely live until 2033. This is an optimistic opinion, similar to the one that I have that the U.S. will always find a way to muddle through even the most severe crisis. On life expectancy, it is probably best to assume a long longevity particularly when you come from a family like mine. Both of my parents are still alive and as some readers know we can trace ancestry back to 1634 when Joseph first came from Bristol England to Virginia and lived 81 years before dying in 1696. While it has been said that the subsequent generation lost the fortune Joseph built drinking and gambling, they did share a similar long life. The life expectancy had to be less than 40 years back in Joseph's time.  So, in doing financial plans now for me, I am going to assume 90 is highly probable.  

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

Saturday, November 29, 2008


I reviewed the Vanguard Asset Allocation semi-annual report today and it is time for me to fire that fund.  This fund went to 100% stocks in January 2008 and has stayed at that level since then.  Consequently it is down almost 40% even after the huge rally last week.  This is not an asset allocation.  In the report, the President and CEO, F. William McNabb III, brags that the fund has had an average annualized return of 4% over the past ten years ending on September 30, 2008 and even that paltry amount has probably largely evaporated in the gas that he is spewing in the report during October and November 2008.  I got some news for this guy.  A 100% allocation to stocks for the entire 2008 period for an asset allocation can not be defended, period. There can be no justification for it. It is simply bad asset management. In 1998, I could have bought a 10 year U.S. treasury directly from the U.S. Treasury under its Treasury Direct program, received about a 5.5% yield, paid no one a commission or an expense ratio, and I would have beaten the Vanguard Asset Allocation fund without making another decision during the past ten years on an annualized return basis to 9/30/2008 and smashed the fund's large negative returns over the past two months. The historical data can be found at the federal reserve's site:

The fund is managed by Mellon who claims in the report that their models work. Maybe they need some refinement or retooling for the future. Whatever Mellon is doing, it has failed in my view. 

All of this writing that I have recently done about asset allocation, partly tied to my developing VIX and other volatility models, has caused me to actually check more precisely my current allocation which is a good thing and not easy for me to do.  You would think that I monitor it closely but actually I just guess at it. It is hard to do.  Some of difficulty has to do with multiple accounts and then some funds have bonds, stocks and cash, requiring an adjustment and split. I excluded all retirement accounts, money set aside for a couple years for living expenses, life insurance cash values, home and all other hard asset values, checking accounts,  and the HSA accounts to try to get a figure for my investable assets other than retirement accounts which stay fully invested about 60/40.

After gathering multiple account information, I found that I have over allocated to cash, with money markets, T Bills, a few CDs and a savings account now at 30% of assets so I over did it last year.  I meant to have closer to 20%. I got carried away last year and it is probably just as well that I waited until now to do this with precision.  Stocks (foreign and domestic)  are at  32% and this includes a wide variety of securities in this category including common stocks, mutual funds, and closed end investment companies consisting of about 200 position.  Long bonds and preferred stocks are at about 10% with 30 positions. Short bonds, less than 5 years to maturity and structured in a ladder, are at 14% with 19 positions.  Tax free bonds, intermediate term, come in at 4%.  Bond ETFs, foreign and domestic, bond mutual funds and non-U.S.  currency  constitute the remainder at 14% total, mostly in Bond ETFs and bond mutual funds.  So this is a good exercise for an old man to go through once a year even though it took two hours.  I am under exposed to stocks which means that I need to increase buying over and above my cash flow until I reach a 50% allocation.   I think that I will take my time.  No wonder I am beating the pants off Vanguard's Asset Allocation fund.  I have stuff that is actually up for the year.  Wow.  Doing better than I thought when I pulled it all together.  

I did not mention in an earlier post discussing VXD that you have to go to Marketwatch to find a long term chart of the DJIA Volatility index, VXD. Notable NEWS: C, DK, NYT/Further Discussion of Volatility and Asset Allocation Yahoo Finance does not have a long term chart.  It is better to use the interactive chart and I think that you have to be a member, which is free. You can also highlight a period on the interactive chart to see a bar chart in more detail. I will do that to focus on a few weeks of action.  In my prior post on VXD, I did not highlight the fact that this index did shoot to over 30 intra-day on August 16, 2007, hitting  34.21 before closing at 28.69.  The VIX closed that same day higher at 30.83 and had a high of 37.5.

My earlier point is that the VXD in the high 20s would in my view be confirming the VIX trigger on August 16th which would start the period rolling for a forced reduction when the VIX fell below 20 again which happened starting on September 25, 2007 and lasting until October 11, 2007 (closing prices of the Dow ranged from 13,778 to 14,015 during that period). The second trigger occurred on 11/7/2007 (VXD was then in the mid 20s and at around 27 a few days later), which would cause yet another forced reduction on 12/26/2007 (Dow at 13,551), a one day period.  So there may be no luxury granted to wait for the best price during the down period for VIX and the up period for the market.   Also, unlike the prior forced reductions in 1997 and 2000, BEEPRA VIX LXPPRD/ More on VIX AND ASSET ALLOCATION you would have been better off this time around taking it all off after the first trigger/warning when the VIX returned to below 20 in October 2007 which I may do next time. Around May 2, 2008, and this is one reason for the 3 month rule on reinvesting the cash raised during the forced reductions, the VIX fell to below 20 and stayed below 20 until June 4th. At best, this was a buy SDS opportunity and a sell of SSO.  The VIX then resumed its unstable pattern and entered phase 2 of its instability after the Lehman failure.   

I am trying to emphasize something in my own inadequate way.  You have to remain flexible and you have to make adjustments based on risk tolerance and one's own financial situation.  History will not repeat itself exactly.  Models are not precise.  Informed and intelligent human judgment has to be exercised at all times.  A model needs to be altered by a thinking person to reflect observed changes in the market's behavior. You can not cling to a model that does not work, as Vanguard is doing. You can not cling to a failed model and say it is doing well. I will not do what those quant funds did at Goldman Sachs and elsewhere that could not adjust to changing circumstance. NYT You can not have a model like the ratings agencies that would not even permit you to plug into the model a fall in home prices.Op-Ed Columnist - All Fall Down - 

You can not always assume that the past will repeat itself over and over again in exactly the same way, with no outlying or unanticipated events.

It is almost humorous to me to read Rubin or some other person, making millions, claiming that this crisis could not be anticipated. Yes, of course, it could have been  anticipated, possibly not in the total number of major failed institutions, but in the overall seriousness of the problem. There was plenty of time in 2007 to alter investment strategy to soften considerably the blow to come. What was Rubin and the managers at Citi doing in 2007?. Taking more risk to make more money for themselves. That is what they were doing. When it went bad,  they run to Uncle Sam and say save me or the entire financial system will implode. That is it in a nutshell. What was Rubin doing in 2007, talking bull with Saudi princes and working on the NYT crossword puzzle? Rather than blaming themselves and their own bad judgments, banks always say it was some unforeseen calamity,  something just way beyond their control (even as they participate in the events that cause the meltdown), an unforeseeable event like the Titanic hitting an iceberg or being stroke by lightening while fetching the paper. They have been saying similar things every time they blow themselves up. Robert Rubin's Detail Deficit | Newsweek Business | I heard the same from them when many of them including Citibank almost failed due to commercial and construction loans circa 1990. 

I basically run for myself a balanced asset allocation fund and I do it differently than anyone else that I know.  I will go anywhere and buy anything, no restrictions on assets classes or categories. I do not listen much to the experts, really could care less about what others may say,  and try to find my own way as I have done for over 40 years. It really takes some doing for so many professional to underperform  benchmark ETFS year after year. Everyone has to find their own way, rely on their own informed judgments, learn from experience, think before reacting, do nothing based on emotion or fear,  always try to figure out when to sell into parabolic moves in any asset class (never buying into it) and most importantly tread carefully for the bear is a most powerful animal that needs all the respect that you can give it. Besides, I have just read that corporate bonds have now outperformed stocks since the major secular bull market in stocks started in 1982 so what is the problem with a few bonds in an asset allocation fund- Vanguard?    

Trading and Asset Allocation in Stable and Unstable VIX Pattern

As I have said, my work on using the VIX as an integral part of an asset allocation strategy is a work in progress. This discussion assumes familiarity with at least the major points made in all of these earlier posts:

Since we are currently in an unstable VIX pattern, I have been focusing my attention on what to do during the bear market. To summarize some of my earlier points, the model required a reduction in stocks in October and December 2007. Until the VIX returns to below 20 and stays below 20 for 3 months, the cash raised in 2007 must remain in cash. I actually started to raise cash before October in addition to the forced reductions required by the model.  

My first attempt to develop a trade during the bear market focused on a swing trade using the double long and short ETFs for the S & P 500, SSO and SDS respectively. It may be questionable to use the SSO, a double long S & P ETF during a bear market, but it does work most of the time in a swing trade during an unstable VIX market pattern. I have not mustered the nerve yet to buy it during a bear market.

Under the model, the SSO would be added during a peak period of market volatility during the bear, meaning a spike to 35 to 40 and then taken off when the VIX returned to 20 or below. The other part of the swing trade was to buy SDS when SSO was sold and vice versa. This strategy would have worked most of the time until this October, when the VIX went to the 35 to 40 level and then spiked in October and November to 60 to 80, which would have caused a failure of the SSO trade and a premature exit from SDS. This is why I have modified this part of the swing trade to do a mental stop loss on the SSO part of the trade when the VIX spikes above 40.

The SSO is a better trade during the stable VIX pattern, which I define to mean 3 consecutive months below 20, and keeping the trade until the start of the unstable VIX pattern, a whipsaw up to over 30 and back down to below 20. In prior Transition Phases from a bull to a bear market, the trigger for disposing of SSO was the first spike out of the stable bull pattern to over 30 and then a sell of SSO when the market returned to below 20. 

A venturesome investor may wait for the return of the VIX to below 20 from a spike to over 30 before unloading the SSO trade while a more conservative investor could unload it at the first sign of the VIX falling out of the stable pattern by moving at least several days to the mid 20s. Another modification that I have made is to keep some SDS in my portfolio as a hedge throughout the unstable VIX pattern which I have not done during this bear market, having sold my entire position during spikes upward in the VIX, and then buying it back when the VIX fell back.  

The SDS, TWM, QID, and SKF trades this year have helped me a good deal. 

But I realize that further refinement is needed and I am still working on it. This is only for those very experienced and comfortable with the inverse ETFs. I found that I had comfort with all of them except for SKF which just spooked me.  

I have allowed for some new investments during an unstable VIX period by investing cash flow and the proceeds from any sale.  

I did not have any VIX data to back up continued investing during a bear market.  By bear market, I am not using the traditional way of measuring it, a decline of 20% in the S & P 500.  I am referring instead to an unstable VIX pattern (sometimes instability will be a bear market as now and in 2001-2002 and sometimes it may be a Transition Phase from the bull to a bear or something very close to a 20% fall in the S & P 500)  

An unstable pattern starts with a clear break in a stable pattern of below 20 with a spike into the the high 20s and low 30s for the VIX. Technically even with this spike, the bull market may continue. 

Talking heads may be saying that it was a correction with the market recovering and the bull resuming its charge to 34,000 or whatever. The VIX will then fall into a Transition phase, marked by a whipsaw pattern up to 30 and down to 20 or below, then back up and then back down. 

In prior transition phases, there could be two of these patterns for the S & P 500 VIX formed with  the bull recovering from the blows which caused the spike in the VIX. But for my asset allocation model this represents the time to reduce allocations to stocks. Until the unstable VIX is resolved by the formation of a stable pattern, I am in my bear market mode, let other people put labels on what they think has happened or happening, calling it a bull, bear, a correction or whatever. 

The 3 month period was established to keep me out with the cash raised by the forced reductions until stability is more than a passing fancy which does happen in bear markets. That is why the SSO trade can sometimes work in an unstable VIX pattern (and admittedly would be the most problematic of the two trades in an unstable VIX pattern). 

It would have worked in the prior bear market when the VIX spiked to 30 in October 2001 when the S & P was around 1060 and would have been taken off in February 2002 when the S & P hit 1106 with the VIX back down to 17.4. Then SDS would be put on and kept until July 2002 when the VIX spiked to 32 and the S & P 500 average fell to 815 which would cause the sell of SDS and a buy of SSO. The next trade would be more than a year later when the VIX fell to 16 in October 2003 with the S & P at 1150. We are now moving into a bull market but I do not know it yet.  If the swing trade was kept, then I would have sold SSO and bought SDS again. Everything is working fine up to  this point. By February 2004, the VIX has been in a stable pattern for 3 months and the model would then require the sale of SDS, probably for a small loss when the S & P was still in the 1150 area and the VIX had fallen to around 15 and a long term buy of SSO kept on until the unstable VIX pattern returned. 

For me, I would be allocating possibly $5,000 to SSO at that point and another $5,000 when it enters a stable bull phase 2 pattern which is not major for me. I would sell out completely, no matter what I thought about it, with a move to the mid 20s lasting more than a few days. 

That trade has worked very well using historical data and hypothetical trades after I developed the trading model based on VIX in 2007.  

There is certainly no guarantee that it will work as well next time but I limit my potential damage from a failed traded by pre-setting my exit point. In other words, I know exactly how I will exit the trade before I make it and will not permit a variation in that decision.  In short, SSO is far more likely to work during a stable bull market pattern compared to its use in the swing trade in the unstable pattern. As I said earlier, it would have failed miserably during the major spike in the VIX this fall which caused me to modify the trade for the future with a stop loss built into it. 

I have seen some writing about VIX and asset allocation but nothing like I have developed for my own use. I am not sure what some people are looking at when they say something about asset allocation and the VIX. To follow what I am saying, I would pull up a long term chart of VIX at yahoo which goes back to 1990 and then another chart of the S & P 500, using the interactive features. Then scroll over the VIX chart during a sustained period of below 20 and then check the S & P chart to see what was happening. Then follow my descriptions of the Transition Phases and the elevated unstable VIX patterns and check the charts. It is clear to me that- so far at least- the VIX can be used as a basis for asset allocations models.  

I read today a report prepared by Bill Swerbenski from Charles Schwab. VIX Up, Market Down?  He claims that the VIX is not a predictor of market moves and up/down movement in the VIX may be more relevant for shorter term trading strategies. I must be looking at different charts than him. When I first looked at the long term VIX chart last year, using monthly closing figures first, it was obvious to me at least-and I am not a CFA or a technician but a humble individual investor-that there was a clear model that jumped off the page for asset allocation lasting for several years before requiring a change. 

Mr. Swerbenski does however provide some useful information for me. He has a chart that shows the market returns one year after major spikes in the VIX. This chart justifies to me at least my current strategy of continuing to invest my cash flow. So now I have some hard data to justify what I am currently doing. 

Test of Vix Model for the Period 1986 to 1988 using CBOE Data for  ^VXO:

Prior to the VIX chart, the CBOE had used the S & P 100 and that chart goes back to 1986 (^VXO).^VXO: Summary for CBOE OEX VOLATILITY INDEX - Yahoo! Finance  I would just briefly describe some of that data. Starting on 1/2/1986^VXO: Historical Prices for CBOE OEX VOLATILITY INDEX - Yahoo! Finance, the VXO was at 18.07 and meandered in the 17 to 21 range until late February when it started to creep up to 22. March and April were spent mostly in a higher range of 22 to 26 which would cause me concern but would not cause a shift in asset allocation. It would have triggered an SSO sale if owned by me but not for the wild and slightly crazed ones (and of course it was not then in existence being a new product). 

By early May 1986, the VXO fell below 20 and stayed there until July when it peeked into the low 20 area before returning to a below 20 range and staying there with a few small exceptions until mid September when it moved back into the mid 20 range. But in October 1986, the VXO moved back into a predominant below 20 range until January 1987 when it returned to mid to low 20s. I have not seen anything yet to cause a trigger on asset allocation but this movement would deserve daily monitoring for a possible change. A trigger does occur in April 1987 with the first spike above 30. If I only had VXO now I could use it with some adjustments. But this close above 30 would start the time running for a forced reduction in stocks.  The forced reduction would occur at any time between July 7, 1987 when the VXO fell to 19.85 until August 10, 1987. 

We all know what happened in October 1987.  I am looking at the daily closing prices in October for the first time for VXO and it shows the stress, using rounded closes at  150, 140, 73, 102, 99, 113, 97, 81 etc.  It was not until November 1988 that the VXO fell to below 20 again. The S & P hit 224 on October 19th, a fall from 307.4 on the first day in the forced reduction period.  This looks like a maximum 1 warning before the storm hit. Unlike subsequent periods where there could be 2 warnings before the crap hit, you would have been smacked after 1 using VXO as the model in 1987. I would not use this index to make allocation decisions now due to the small number of stocks in it and probably would not even consult it. It does give me some data four years before the CBOE VIX chart starts to test my thesis and theories which is the only reason for bringing it up. 

So, that is where I am now. I do not own SSO or SDS. I am not likely to do the SDS part of the swing trade more than one year into the start of the bear market, given the usual length of these events. In the future, I will start SSO after three months of a stable pattern or possibly a few days earlier provided my comfort level is extremely high about the formation of an investable bull market. I will add SDS and keep it throughout the next unstable period as insurance and as a hedge rather than as an investment. I will continue to add selectively to my stock positions during the current unstable VIX period with cash flow or the proceeds from sales until the S & P 500 closes below 815, restarting that program if stopped by a close below 815 as described above. I will allow some short bond positions to mature in May and September 2009 without re-allocating back into short term bonds, reserving the funds for stocks including at some point the SSO buy. I will continue to modify the model as circumstances warrant. Lastly, I do not make large allocation decisions based on any model or an opinion that may pops into my head like every five seconds. At most, I would use my models to reduce stocks by 30% because I never know going into the bear how bad it will be. Reinvesting dividends in the bear market ultimately will prove to be fruitful assuming no 10 year type of great depression.   If the Dow returns to 14000 in a few years, reinvesting dividends at the current prices will look good later on, if no so hot now. 

Judging from the experience with VXO in 1987, a major spike in volatility as experienced in October 1987 may take a year or more to resolve itself into into an investable bull market.  We entered a similar extreme volatility phase in October 2008 so I am not anticipating now a quick return to a stable VIX.  As some are fond of saying, not me of course, this time may be different. 

Friday, November 28, 2008


Robert Rubin, the wise man of Citigroup, who has received 115 million plus stock options since 1999 apparently to be an ornament hanging next to the CEO's office, defended his role as a member of the Board and senior advisor by saying  Citigroup's near collapse was due to the buckling of the financial system.  

Rubin claims that he was just an innocent bystander and peripheral to everything happening at the bank while acknowledging that he was involved in the decision to ramp up risk taking while he was stating that investors were taking too much risk.  

Apparently, it is not the job of either the senior managers or Board members to be informed about the kind of risks being taken by the bank, even when those risks total say 50 billion in CDO garbage, or to insure that proper risk control measures are in place.  The WSJ and N Y Post called for the resignation of the Board.  Reuters For almost two years, I have been reading stories about the developing fiasco in the mortgage market. It was not difficult for anyone to see serious problems in the mortgage market since early 2007.  

Apparently, Rubin does not read the papers or try to stay informed about major events impacting the operations of the bank paying him millions each year to give senior managers the benefit of his wisdom and experience. Why did he fail to monitor and question what the bank was doing with mortgage securities in early 2007 when the importance was evident even to a casual reader of the financial news. 

Why does Citi need a bailout and J P Morgon does not?  It is an outrage that the members of the Board still have their jobs with each taxpayer having to guarantee $1000 of CITI's toxic assets as pointed out in the WSJ editorial. I can understand why Rubin went to the WSJ to defend himself rather than the NYT, which ran a scathing article about the senior leadership at Citigroup including Rubin. NYT 

And two of my prior posts:
Rubin defending himself to a WSJ reporter is like a Republican going to FOX to receive the "tough" questions.  


As an unhappy owner of Bank of America, I reviewed the story about UBS slashing its target on Bank of America Reuters  The downgrade appears to be based on BAC's recent acquisition of Countrywide and the pending acquisition of Merrill Lynch which together add a lot of toxic waste to BAC's balance sheet.  Thanks, I already knew that but does anyone outside of the bank really have a handle on just how many problems Ken Lewis has added by his relentless pursuit of acquisitions.  I doubt that the wise sages inside the bank even know the answer to that query, let alone an analyst from UBS or an old man whose headquarters is a house in the SUV Capital of the World.  I have always suspected that banks did not have a thorough understanding of the risks on their balance sheets and the events of the past year merely confirm my beliefs, as did prior events from the early 1990s, the late 1970s and early 1980s, and 1973 to 1974.  Give them time, and the banks will find a way to blow themselves up. As I have said, if you dig a deep hole in the ground, some banker will come around and jump head first into it.  In that respect, I have about as much confidence in holding a bank stock as I would a homebuilder, whose capacity to be going 100 mph-peddle to the medal in a Yugo- into a concrete wall is unmatched by any other industry group, not even the bankers-though the bankers are close in the degree of reckless behavior.  The latest examples are well known and I have discussed them already in excruciating detail.  I have not mentioned the absurd bridge loans that they made in 2006 to 2008 to private equity firms seeking to acquire corporations by borrowing most of the money. Money was lent to the tunes of billions of dollars in these highly leveraged deals, with the hope the banks could get their money back by later selling bonds in the now debt ladened acquired company. The big banks were happy to oblige, winnowing down any of the traditional protections for lenders in the loan documents, accepting covenant lite conditions, and then finding that they had to eat the loans because no one would buy them. Seeking Alpha : 2008 : Live-Blogging the KKR PE Investors Call

I am a holder of BAC, and regret it, and classify it as a mistake.  I am no hurry to sell, however, and will probably be stuck with my investment for a few years.  I need to learn my lessons that I try to teach myself better.  Sometimes I just do not listen.   Is it possible that Bank of America will be in need of a bailout just like Citigroup, as suggested by a money manager?  Reuters  I suspect that BAC is better managed than Citigroup but the acquisitions of Countrywide and Merrill probably does place BAC near the top of major banks that may need a Citigroup bailout. 

Glimcher has a troubled mall in Charlotte, North Carolina called Eastland.  I knew about it when I made my recent foray into GRTPRF.  Judging from a recently filed 8-K, it appears that the existing loan on the mall for 42 million was non-recourse. GRT will pay some operating expenses while an attempt is made to sell the mall but GRT can cede title to the lender in the event this effort is not successful before 9/2009  and will simply pay interest on the outstanding loan with no principal payments until that date or earlier if the mall is sold. Summary of GLIMCHER REALTY TRUST - Yahoo! Finance  
I may be reading that wrong but that is how I interpret this filing.  It is always advantageous to a REIT to have a non-recourse secured loan in the event the property runs into trouble, as this three decade old mall apparently did at some point.  I would add that Glimcher had to accept on recent loans  a 50% recourse provision which indicates that it has lost some leverage with lenders.   Yahoo! Finance  This could be trouble a few years down the road. 

I have always wondered about my unknown compadres in the investing world.  On Monday of this week , I bought shares in Lincoln National at $6.45 Time to Fire my Head Trader: He Bought LNC
Today, after a shortened trading week, it closed at 13.73.  Is that insane or how would you characterize it when the stock of a large company gains more than 100% in a week?  I always wondered about being rational, maybe I ought to be drinking whatever everyone else was having. How could anyone call the market efficient and rational?  But, more than the wild fluctuations in individual stock names, the price of U.S. treasuries makes no sense to me at all.  Prices  just hit a 50  year low.  Investors are lending the U.S. government, hardly the bastion of prudent spending and behavior,  money at negative real rates of return, guaranteed to lose money after inflation, let alone after taxes. Disaster will have to happen to bail out those lending the U.S. money at 3% for 10 years.  Maybe they are right and everything will just go to hell in a replay of the Great Depression.  I do not see it that way and believe that the ones loading up on treasury debt, fleeing all other asset classes, have let their fears get the better of them. Nonetheless, I do hold some treasuries, just in case these fools are right. 

Maturity Dates: Bonds, Perpetual Preferred Stocks/INZ, CUSPRB, GRT, FRPRJ, METPRA

I mentioned in a post earlier today that I will not buy a bond with a maturity date after 2038.Continued Discussion on Trust Certificates & Forbes Article/DKR  I may forget that rule being an old man but will correct any mistake once I realize that made it. I would like to emphasize that I underweight long bonds due to inflation and credit risk concerns.  I am also more likely to trade them, while holding onto my short individual bond positions until maturity. My main risk with short bonds, less than five years until maturity, is credit risk.  I also mix individual bond positions with ETFs.  My most severe underweight in the bond portion of my portfolio is in perpetual preferred issues.  An accountant might say that a preferred stock is equity which is true if you look at the balance sheet (under shareholder's equity).  It is not included in debt.  But I have never viewed it as such, since the bond characteristics of a preferred stock dominant over any equity aspect to me as an investor.   It is in my view as an investor in, rather than an issuer of preferred stock, a very junior form of debt. Many of these issues have no maturity date. This is a negative feature of them. The lack of maturity places them on the same footing for me as that Motorola bond maturing in 2097.  The Motorola bond maturing in 2097 is effect a bond with no maturity for me.  The lack of a maturity date will cause me to severely underweight preferred stocks as an asset class in the bond part of my portfolio.  For them, I am looking for opportunities to receive current yield with the potential to trade any purchase at a higher price.  So, I have to be an opportunistic buyer and seller of such securities.

  An example is the ING perpetual preferred stock bought a few weeks ago in very small increments, two 50 share lots.    I have already realized a profit on the first 50 share lot, using FIFO accounting, and I will hold the second purchased at less than 8 for the dividend plus a potential long term capital gain.  It just went ex dividend. So as described in the following posts, I took a small position in this perpetual preferred on an opportunistic basis after a severe price decline, sold the first 50 shares bought at around 10 at close to 14.5 for over a  200 dollar profit, and I am currently holding 50 bought purchased at less than 8 which will give me close to a 23% annual dividend.   
One way to look at this is that I am trying to make a profit in two ways, but one way is not holding to maturity to capture the spread between cost and par value since there is no maturity.  Instead, I have to buy at distressed levels, hope for a rebound, choose my entry points carefully, and trade part of the position when presented with a profit opportunity on the appreciation in share price.  For INZ, in the parlance of a gambler, I am playing with the house's money considering all of the buys and sells made in ING preferred issues. 

 The same is basically true for the REIT preferred stocks that I have bought.  I am buying for the current yield and I am alert for a trade at a profit.  This is shown by the dumping of CUZPRB on a price spike just recently, having already traded one or the other preferred issues of Cousins at a profit several times, and  I have received as well some dividends.    REITS: FIRST INDUSTRIAL AND COUSINS PROPERTIES
I basically decide how much risk to take with these issues by the amount of money allocated to buy the shares, which is always an insignificant amount to me.  So, for something like GRTPRF which is extremely risky but still paying dividends as of today, I would risk about $300 in exchange for the 75% annualized yield at my cost of $2.9.   For FRPRJ, I risked about $400. Hard to Get Excited  This goes without saying but the only reason that this issues yield so much is a fear of bankruptcy or a deferral of the dividend for these cumulative preferred issues due to a solvency event.  If that fear is overblown, the potential upside on the price side of the equation is potentially significant.  Only time will tell. So, even though they do not have a maturity date, the potential for share appreciation is present when the market participants believe the storm has passed and the dividend is safe again, for no one would pass up a 75% annualized yield that looked reasonably secure (no absolutes even under the best of circumstances and economic conditions-this is not treasury debt)  When the prevailing view is too the contrary, as now, then that creates the opportunity and highlights the substantial risk involved in fishing in these treacherous waters where on one or more issues I expect to be eaten by a shark.   

The floating rate preferreds are also perpetual so that automatically means a far lower allocation to them.  I discussed earlier why I would buy METPRA.  I allocate some funds to them because of two considerations. The first has to with the guarantee of 4% which is not interesting until the price of the security plummets, currently around 9 bucks with a $25 par value. It just went ex dividend.    The guarantee doubles to 8% at 12.5 and increases to 14.3% at my last buy at 7.  But I would not touch them just for that reason.  This floater pays the greater of 4% or 1% over 3 month LIBOR.  The float provision gives me protection, as I explained earlier, in the event short rates move up.   LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK
Another one is the Aegon floating rate preferred. AEB AND JQC

Continued Discussion on Trust Certificates & Forbes Article/DKR

I mentioned earlier that there had been no notice published of the ex interest and payment date for the semi-annual interest due from DKR, the TC containing a senior bond from Hertz due in 2012.  I suspected it went ex interest on 11/21 and this proved to be correct.  The notice was published today in the WSJ dividend section. Dividends - Markets Data Center - Payment will be made on 12/1.

My ownership of DKR highlights one of my main differences with Richard Lehmann's recommendations in his article in this week's Forbes. For me, it is extremely important to try and make money in two ways from a bond holding.  I always perform two calculations.  How much will the yield be at my cost which Lehmann does provide in the article for the three TCs that he recommends?  Then, how much will I make when the bond matures and what is the additional yield provided by the spread between cost and par value amortized over the remaining life of the bond?  I want to be able to make money in two ways, from the current yield and the spread between cost and par.  I can not do that by buying a bond maturing in 2097.  I am likely to live long enough to capture the spread of a Motorola bond maturing in 2028. So, if I was interested in a TC containing a Motorola bond, I would not choose the one recommended in the Forbes article but the one which is not mentioned that matures in 2028 that would give me a similar current yield plus the spread assuming I choose to hold it until maturity.   Article in this Week's Forbes on Trust Certificates/Trust the Government?  I would not have a bought a very risky bond- the underlying Hertz bond contained in DKR -unless I could make money in two ways.  I would not take the risk for just the current yield.  Moreover, I would not buy a long term bond issued by Hertz.  I bought the Hertz TC only because it matures in June 2012 and it was selling at close to a 75% discount to par value. This TC is discussed in several posts but the most detailed discussion is in these posts.TRUST CERTIFICATE HERTZ BOND DKRHERTZ BONDS Most of my potential return on this one originates from the spread, a staggering 73% annualized return to June 2012, caused by the short maturity and the deep discount.  While the coupon yield at my cost is certainly enticing, at about 25% a year, I would not venture into buying this TC just for that return given the risk.  I also limited my potential downside by buying only a small amount-100 shares.  Even though this is small, I survive only by treating $700 the same way that I would $70,000.  This means that I am constantly monitoring Hertz's earnings and financial condition to ascertain whether I should try to hold until 2012.  So, this analyst has many moving parts.  Initially, however, I would rule out any bond maturing after 2038 just on the maturity date alone with no other consideration entering into the analysis.  Thus, I jettisoned the idea of buying the TC with the Motorola bond in 2097 (XFH) as soon as I saw the maturity date but I still monitor the other one maturing in 2028 as almost bought it recently (XFJ).   

Thursday, November 27, 2008

Article in this Week's Forbes on Trust Certificates/Trust the Government?

1. Confused Article In Forbes About Trust Certificates:  There is an article in this week's Forbes which contains the first discussion of Trust Certificates that I have seen in a financial publication and it is not very good.  The author is Richard Lehmann  He mentions that one of the hardest hit areas is "preferreds-not preferred stocks but bond issues packaged as interest-paying and exchange traded preferred securities that usually have a $25 par value".  They are not preferred securities but Trust Certificates.  The Certificates represent an undivided beneficial ownership interest in the assets of the Trust, and the property of the Trust consists of bonds from one issuer.   To avoid confusion, it is best to avoid describing the Trust Certificate form of ownership as a preferred security.  The Trust Certificate represents that undivided beneficial interest in the assets of the Trust.

Lehmann is accurate in saying that the yields on the trust certificates are often one to three points higher than the yields of the underlying bonds.  Actually, during periods of stress in the stock market, these certificates can trade to yield as much as five percent more than the underlying bonds contained in them.  I know that because I have bought some with that yield advantage.  I always check the price of the underlying bond before buying a TC.  He attributes this mispricing to several factors, including the false assumption that the original creators of the trusts, firms like Lehman and Merrill Lynch, may have some involvement in them now, other than possibly as a co-trustee or having an obligation to file annual reports with the SEC. He is correct in saying that the original creator of the trust is irrelevant.  He also points out the low trading volume which keeps institutions out of the market but I have seen some mutual funds own these TCs including Loomis Sayles retail bond fund.

The most important factor causing the mispricing in my view is that the trading is dominated by individuals, who may not fully understand these securities, are often influenced by swoons in the stock market to sell what is in effect a bond which makes no sense, or possibly some sales in this thinly traded market are individuals being forced to raise cash as a result of margin calls caused by steep declines in their stock portfolios.  Whatever the reason, and I watch this everyday, pricing is frequently inefficient.   I see days like those in mid July or the meltdowns in stocks during this November or October, and the mispricing  of many of these securities become even more pronounced, generally on light volume of a few hundred shares. This kind of reaction occurs oddly on days when the bond market is rallying and the stock market is in the crapper big time.  In short, if the sales are not forced due to margin calls, then they are irrational. 

My main problem with the article in Forbes is the three issues that he recommends.  I am aware of all three, having looked at them and passed on each of them.   He mentions one that contains a Motorola bond XFH.  It is a $25 par value with a 8.2% coupon currently selling at about 12.5.  The institutional bond market prices the underlying bond at a price to yield about 13% and this TC containing the same bond yields over 17%.  All of that is fine and good except this particular Motorola bond matures in 2097.  One of the upsides for an individual buyer is capturing the spread between the price paid and par value at maturity.  This is an illusion for a $25 par value security maturing in 2097.   I would disagree with anyone recommending a bond maturing so far in the future.  I am also  skeptical of Motorola's future.  I did look and almost bought another TC containing a Motorola bond maturing in 2028, which is an acceptable range for a long bond, as long as you know the dangers of long bond investing going beyond credit worthiness.   The symbol of this TC that I have thought about buying  is XFJ and it has a 8.375% coupon and trades now at about 13 after gaining a buck last Friday.  It just went ex interest.  The yield of these two TCs is about the same but the one which is not recommended by the Forbes columnist matures almost seventy years sooner, a much better alternative for an individual to say the least.  

 He also mentions a Credit Suisse bond traded in a TC, DKY, trading to yield 10% at a $17 price whereas the AA- bond trades to yield 7.2%.  I am wary of buying bonds in an investment bank which is why I do not own this one or the other one he recommends from Goldman Sachs, PJI.  I would simply say that anyone interested in the Credit Suisse bond traded in TC form will need to compare the price of DKY with another TC which contains the same bond originated by another broker, PYE.    As of last Friday, PYE was cheaper than DKY and would consequently give a buyer more yield, bang for the buck.  PYE was originated by Merrill Lynch and DKY was originated by Morgan Stanley.

If anyone can find a material difference, let me know. This is the link to PYE prospectus: 

This is the link to DKY prospectus:

Any discussion of buying in this market needs to discuss the fact that the same bond is often found in two or more TCs and the prices of those securities will often vary considerably from one another, creating yet another inefficiency that can be exploited by those with knowledge about them. 

Another issue with these TCs is that some of them contain a senior bond and others contain the less desirable  so-called "trust preferreds" which are in reality junior subordinated debentures similar to those issued by banks which I discussed in connection with my earlier buy and sell of KEYPRA. (2nd paragraph of TAX LOSS SELLING TODAY  and for the buy KEYPRA) There are many important differences in these two types of securities.  I have mentioned that I frequently trade the TCs containing AON junior debentures. These securities are junior to AON's senior debt which simply means that the senior debt has to be paid before the junior debt holders and senior debt has a higher priority claim on the firm's assets in the event of a bankruptcy.

There is another important distinction.  Interest payments on "trust preferreds" are deferrable,  often for long periods, sometimes for up to five years,  whereas that right is not an option on a senior bond.  A failure to pay a senior bond holder will be the first step toward bankruptcy.  This makes the AON junior bonds less desirable than a senior bond from the same company or another company with similar credit characteristics.  I am currently comfortable holding the AON TCs KTN and KVW because of my current view about AON's credit.  The Motorola bond is a senior bond as is the Verizon and AT & T bonds, as well as many others, that I have discussed in this post over the last two months. 

2. Safe Levels of Melamine in Infant Formula: For those willing to place blind trust in the actions of any government, and did not learn any lessons over the past eight years, for ignorance can foster a form of bliss and contentment, this story is instructive.  The FDA had previously made statements that there are no safe levels of melamine for infants.  The FDA did not voluntarily disclose to the public that it had found trace amounts of melamine and cyanuric acid in infant formulas sold in the U.S.  If   melamine and cynauric acid combine, "they can form round yellow crystals that can also damage kidneys and destroy renal function."FDA Draws Fire Over Chemicals In Baby Formula -  After the Associated Press got the agency to disgorge the data pursuant to a Freedom of Information Act request, the FDA now responds that the trace amounts are no problem.  

I am naturally a skeptical person and I am always trying to find out as much as I can about the government lying to its citizens.  I am not being political here.  I remember the Gulf of Tonkin resolution and the false claims used by  LBJ to secure a war resolution from Congress concerning the Vietnam WarGulf of Tonkin Resolution I was in graduate school during the Watergate era and watched the hearings.   I did a lot of reading on American history in college.  It was easy to become a cynic.

3. Lying About the Use of Aluminum Tubes: For some reason this story about the FDA brought to the forefront on my memory, for reasons that are inexplicable, W's claim about aluminum tubes and the alleged Iraqi nuclear program used to justify the invasion of a country that had not attacked us.  Some say that W was just a victim of bad intelligence.  I beg to differ.

Even before Congress approved the war resolution, W knew that the aluminum tubes that had been captured in route to Iraq could not be used as centrifuges to enrich uranium.  The tubes had been examined by the leading American experts in centrifuge enrichment at Oak Ridge and W had been told that they could not be used to enrich uranium. 

As it turn out, there was a guy name Joe at the CIA who was not an expert on the use of centrifuges who disagreed with the real experts and W went with Joe.  Then the American public and Congress are told the story based on Joe's opinion and Congress is given a report that contains Joe's opinion in the body of the report, with a footnote saying the Department of Energy disagreed.  Congress being afraid to challenge W just before an election hardly raised a question about this or any other claim known to be false, questionable or exaggerated by W 's administration.

I first read about this issue in several articles in the Washington Post and later in the congressional report on the use of intelligence to justify the war. To me, I view W's claim on the aluminum tubes to be a lie. Some do not know the distinction between a lie and the truth, and would characterize the claim by W, being based as it was on Joe's opinion, to be a true statement. I do not understand that belief.  The truth would be to tell the American people that the experts said the aluminum tubes could not be used in the enrichment process and other experts said the tubes were for use in conventional rockets which is what they actually were, while someone who was not an expert claimed otherwise.  Joe was the CIA's guy on export control.   But if W had told the truth, you could not use those tubes as part of your case for war based on Iraq attempting to develop an nuclear bomb that it was going to drop on the U.S. any day, for the best and most reliable evidence was that the tubes were not part of a nuclear program and W knew it.  See, generally, ( 

As an academic, Wood said, he would not describe "anything that you absolutely could not do." But he said he would "like to see, if they're going to make that claim, that they have some explanation of how you do that. Because I don't see how you do it"


Before leaving this morning to eat my turkey and watch the Titans play, I just happened to check the CBOE website and found that there are three new volatility indexes: GOLD, OIL and the Euro currency.CBOE - Micro Site  There are no new futures contracts yet for these new indexes and the charts provided do not provide enough history for me to develop a model.  But it is something new for me to monitor and to play with.  Gold (GVZ); OIL (OVX); EURO (EVZ).  Of these, I will develop a model for both gold and oil which I do trade, in one form or the other.  Since I will always sell into parabolic moves of any asset class, I no longer have a position in OIL, UNG or GLD. I was trying to figure out when to buy again.  I have dipped my toe back into the water by buying Yamana Gold   AUY: Summary for YAMANA GOLD INC - Yahoo! Finance and small positions in a few canadian energy trustsHome Prices/Lexington Realty (LXP) & LXPPRD/GXP/PWE/AAV having sold everything else during the parabolic move
in energy prices,  including all of the Canadian energy trusts, natural resource mutual funds (two of them), OIL and UNG, keeping the Blackrock Real Asset fund ( BCF), a closed end fund, to my chagrin and actually buying more of that one with cash flow.   I have mentioned that different asset classes need to be evaluated separately to understand how to perform an asset allocation using volatility indexes.  While VXD and VIX are similar to one another, I had to develop a separate analysis for RVX and VXN.   Judging from the few months of data available on gold and oil, I will need to do a new analysis for the commodities.  I am using my VIX model to time allocations to stocks, looking to the VXD model for confirmation, and then using the models on RVX and VXN to help me decide what to sell.VIX ASSET ALLOCATION MODEL: FORCED REDUCTIONS

Wednesday, November 26, 2008


I have previously discussed using the VIX as an integral part of an asset allocation model. These posts are scattered but here is a link to some of them:

The discussions occur throughout my posts with some of the more detailed discussions made during some of the more recent posts. One area that is a work in progress is what to sell during a forced reduction in stocks generated by the model.  My approach last year was somewhat haphazard since this is a new model for me.  My first thought was to eliminate high beta stocks, to reduce reduce exposure to emerging markets to almost nil, and to sell non-dividend paying small cap stocks (one of my favorite asset classes).   Since we have a volatility index linked to the Russell 2000, RVX, I could look to that index for confirmation of trouble for small caps.   I would like to have volatility indexes for all asset classes to help me with this allocation.  My model for the RVX is more complicated but it did confirm my decision to include small caps in the forced liquidation.  Next time, I will include all closed end investment funds since the discount to NAV rises considerably when individuals are under stress caused by a bear market, and even now discounts of over 20% are widespread.  Why does this make a difference?  You suffer a double whammy, a fall caused by the bear market plus a widening of the discount from around 10% to 25% or higher.  Some discounts reached 40% during periods of maximum stress. Needless to say, any leverage would need to be eliminated and that would include leveraged funds that use borrowed money to enhance returns.  Leverage will only accelerate the down move (the more you own, the worse it is)  Another rule that I follow after the forced reduction is that common stock buys can only be made from the proceeds of a sale or from cash flow generated by dividends or interest payments.  I would not deploy the cash raised from my VIX model's forced reduction until I receive a signal of the return of a stable VIX consistent with an investable bull market.    Another modification that I have made is to buy SDS as insurance when the VIX swings from the mid 30s back to 16 to 20, reinvest the dividends and this would be kept until a stable VIX pattern returns.  Dividends would be reinvested into shares.  That holding is separate from the SDS/SSO swing trade during an unstable VIX pattern which I have discussed.  Gold and Silver ETF buys are not controlled by the VIX model. I have traded OIL and UNG but this has been by the seat of my pants and the commodities are likewise not governed by the VIX model.  If a volatility index is developed similar to VIX for commodities, I might start to use it some.  Lastly, I am not a slave to my model.  The model is subject to change by a human being when circumstances warrant.  The most recent change had to do with the SSO/SDS SWING trade, which now requires a stop loss on the SSO part whenever the VIX goes over 40 for the more conservative trader or over 45 for the crazy ones.  The SDS part has been modified to allow 1/2 of a position to be placed in the unstable VIX pattern when the VIX first goes back under 20 after spiking to over 30 out of a stable bull pattern with the remainder placed at discretion of the trader but preferably below 18.   For the SDS held in the Swing Trade, then the sell can occur in increments too, at or close to a 30 VIX (possibly as low as 28) with the remainder on a spike day to 33 to 38 which is where the SSO would replace the SDS in the swing trade.  I also used TWM this year and SKF.    The later was just too wild for this old man when it started to move in 10 dollar a day increments to the upside.  TWM had a lot of movement too.  It is tough to stick with the double short trades but so far I am comfortable with my system with the modifications made in it and discussed above.  Now, I do not have a trade and the model would have me out of SSO when the VIX passed 40. Next time, I will keep at least 100 SDS for the duration of the unstable VIX pattern-as a form of insurance, which I did not do for this bear market.  Using the double shorts and double long ETFs appears to me, at least it does now, to be part of a viable strategy tied to the VIX models that I have developed.  This is not for the easily flummoxed and disturbed or for those without extensive experience.