Monday, December 8, 2008

A 10% 4th Quarter Decline in Revenues May be the Norm/more on VIX and My Asset Allocation Decisions

Although the bad news continued to flow this morning, the market intends to shrug it off-at least initially-which is probably a good sign. Or, maybe I am just searching too hard for a glimmer of hope.  MMM cut its forecast for 2008 earnings from a range of $5.40 to $5.48 to $5.10 to 5.15 and further lowered its 2009 forecast. MarketWatch

Revenues will fall about 10% in the 4th quarter and MMM will cut 1,800 jobs during this quarter.  Dow Chemical announced that it will cut about 11% of its global workforce. MarketWatch Illinois Tool (ITW) cut its 4th quarter forecast to .44 to .52 from a range of .74 to .82 issued on 10/16. MarketWatch 

Two of the TCs that I own declared their semi-annual interest payments, KTN and KVW, both containing Aon junior debentures. Dividends - Markets Data Center - Both go ex interest near the end of this month with interest payable on 1/2/09.  I recently added KTN in a retirement account at less than 14.

This one yields 8.2%.  Prior to that, in the same retirement account I bought another TC containing an AON junior debenture, maturing at the same time as KTN, that yields 8% and the symbol is KVW. I may sell  KVW in that account and keep the higher yielding KTN purchased at a lower price than my earlier buy of KVW.  
If I am having trouble now, it is partly due to indecision, which is sometimes reflected in starting and stopping  common stock buys using just my cash flow from interest and dividends. I am already reinvesting dividends in several stocks and funds which is a way to average down in a bear market.  My model on asset allocation based on the VIX restrains me from using my cash allocation to buy any stocks until the VIX falls below 20 and stays there for 3 months.  My brother asked me the other day when this might be and I replied "not soon". During the last bear market, there would have been a forced reduction in August 2000 under this VIX asset allocation model,  but the stable bull VIX pattern did not arrive until February 2004.  I am already bored after 1 year since the forced reductions last year so I need to occupy myself with some purchases to keep my mind from turning into mush. I will not be any good to anyone by becoming prematurely brain dead. So, what the heck, I will just continue buying common stocks with cash flow and see what the future will bring. Technically, under my own model, it would be best (meaning safer for me)  just to hoard that cash until the stable bull pattern forms and then go all-in with the entire cash accumulation and then take it back off after the formation of the unstable VIX pattern as described ad nauseum in prior posts. See, for example,

Boredom trumps models, at least to a minor degree.

I am also trying to work through how to use this model for the next bear market. My inclination changes weekly as I try to sort it out. It is better for me to start thinking about it now, and I have consequently started to think about it even though it may be years away.  Given my age and generally conservative nature, I am leaning now to a forced stock reduction of at least 30%, maybe as much as 50%, when the VIX breaks out of a stable bull pattern to over 28 (down from 30 now for me given my age and risk tolerance when this happens way into the future) and wait to actually perform the reduction, possibly all in one rally day, when the VIX falls below 20. The amount of SDS bought as insurance would depend on the size of the reduction which is my current thinking on this subject.  So I would buy more SDS for a smaller forced reduction. (going into a bear pattern, there is just no way to know how bad it will be so I am also thinking of adding even more SDS as insurance with a break into a phase 2 bear pattern which I am defining to mean a decisive break in the VIX above 40 and continuing above 40 for several days). And for the next bull market, I am going to add SSO sooner (to get more bank for the buck)  than I have been talking about, initiating a 1/2 position when I become convinced that the unstable VIX pattern is resolving itself to a stable one, possibly allowing entry a few days before 3 months while keeping the 3 month period for deploying the cash accumulation which hopefully would avoid a premature entry into some kind of "sucker" rally in an ongoing bear market. The 3 month period has proven a good indicator in a historical test that I ran on the model, but of course it has no guarantee for the future. Actually, if a unstable period started again soon after that 3 month period, it would initiate a quick forced reduction again, and the money would have to pulled back out of the stock market. 

I do not use the VIX to trade, or to predict daily or monthly price movements. I am only interested in it as it relates to longer term asset allocation decisions that may last several years. Prior to its development as a personal tool to guide me on asset allocation decisions, I tried to do asset allocation based on feel as much as anything and I was looking for something last year to assist me on timing decisions in an asset allocation framework. I was nervous last year, as I was in 1997 to 2000, and being nervous would just lead to a somewhat haphazard changes in allocation decisions (rarely do I know the exact allocation as shown in this post written after I spent a couple of hours trying to figure it out VANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD -a good part of the surprise on the % stock allocation was due to declines in the market in addition to the forced and other reductions)   So I found VIX looking for something to assist me in making these decisions.  Now, I am more structured than before 2007, but it is still a work in progress.  

  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.    

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