Friday, December 5, 2008


Very few asset classes will work in this market. Recently, there has been a bull market in the Japanese Yen (FXY)  and the U.S. Dollar, and U.S. Treasury debt, all in a flight to safety. One of the few ways to play a rise in the U.S. dollar for an individual investor is by buying an ETF called Powershares U.S. Index Bullish fund )(UUP).

UUP: Summary for PS DB USD IDX BL FD 
I do not have a position in that ETF, although I did own its cousin (UDN) last year as part of an overall effort to profit from the fall in the U.S. dollar that also included holdings in foreign currency ETFs such as FXC, FXA, and FXF. I am down to owning just 30 shares of FXA. I also have no position, and have had no position since last year, in any of the commodity ETFs.

 One of my reasons for owning the Canadian and Australian currencies is no longer prevalent, the appreciation in commodities, and I view part of the strength until recently in these currencies to be due to the rise in commodity prices. Another reason had to do with interest rate differentials which is in part captured by these foreign currency ETFs net of expenses. CurrencyShares Australian Dollar Trust Overview

However, the major reason for selling out of the foreign currencies last year had more to due with my view on currency cycles.  It is just hard for a major currency to maintain a bull market for five years.  I will just leave a position in the fifth year of a currency market, if not sooner, just based on this belief that the worm will soon turn.

As federal reserve banks around the world slash interest rates, the interest received on Aussie or Canadian dollars has likewise fallen.  There was a period earlier in the year-and in prior years- when there was a much wider spread between the short rates earned by the Aussie and U.S. dollars.  

Stocks (domestic and foreign),  commodities, precious metals, real estate,  corporate debt including both investment grade and high yield, emerging market debt and foreign inflation protected debt, and many private equity/hedge funds have all plummeted in value.   

A consumer staple stock like Proctor & Gamble (PG) has simply avoided going down significantly. A stock like General Mills (GIS) is one of the few large caps that has held its value this year.  One of the last ETFs sold by me was KXI,  Ishares Global Consumer Staples.  

Even it has lost $13 since mid September.  As everyone already knows, it is hard to find any asset class increasing in value other than Treasuries, Yen, U.S. Dollars, cash invested in money markets and CDs and inverse ETFS such as SDS, TWM, and SKF which I now view as an asset class that I currently have zero exposure-unfortunately. As I have discussed previously, I intend to keep at least SDS throughout an unstable VIX pattern in the future, and may even include a smaller amount of TWM too. TWM: Summary for ULTRASHORT RUSSELL20

If I had done that for this bear market, TWM would have been bought for example in October 2007 in the low 60s and dividends would be reinvested for the life of the unstable pattern. Instead, since my VIX model was developed in mid 2007, and was a work in progress as to what to do during an unstable pattern, I was content to trade TWM and SDS.  I am now too conservative to buy them back so deep into a bear market.  I would not have any problem holding on to them as insurance/hedge provided the shares held were bought in October 2007. 

I suspect that the next asset class to rise in value will be U.S. investment grade debt which has started to recover from the swoon taken in the September to November period. And, most of the appreciation may very well be limited to the upper tier of investment grade bonds. I am participating now in this asset class by recently buying the ETF LQD, which has about 100 investment grades bonds in it and TCs containing senior investment grade bonds.  

My main issue with that ETF is that it trades too far above its asset value (NAV yesterday was 90.59 and the closing price was 92.51)  As long as deflation is the prevailing theme, as now, and investors start to look for some extra yield, this asset class should continue to improve.  

This would be the rational response to 10 year Treasury yields at 2.7% but the market can remain irrational longer than an investor can remain solvent as Keynes once said. At some point, possibly in the second half of next year, I may balance LQD with more inflation protected bonds including a few exchange traded corporate bonds whose monthly interest payments are tied to a percentage over the CPI index. 

I  have a small position in one of them now selling at about at 60% discount to par value and maturing in less than 10 years. I might also consider late in 2009 or early 2010 buying insurance for my bond positions by acquiring some shares in an inverse bond ETF.  

So I am trying to think ahead about how to alter asset allocations in the bond part of my portfolio in 2009 and 2010.   

The jobs report this morning was just more bad news which will flow virtually without interruption for months to come.  The jobless rate rose to a 15 year high at 6.7% and payrolls were reduced by 533,000 in November.  

The job losses for the prior two months were revised further downward. The number of unemployed and those who have become discouraged or reduced to part time employment rose to 12.5%. MarketWatch I would anticipate an acceleration of the job cuts since I do not believe the worst has yet to arrive. 

The number of delinquencies in mortgages has now risen to 6.99% of loans outstanding and close to 3% of the mortgages were in some stage of foreclosure. MarketWatch

Near my house in Brentwood, Tennessee, about one year ago or more a developer finished putting in sewers, roads, underground utilities and a very expensive stone entrance in a large development. This is one of the largest tracts of land for residential housing left in Brentwood. Brentwood is a very strong real estate market in a still vibrant Middle Tennessee economy.  Over the past year, there has not been any activity in this development, not one stake placed in the ground. I have decided to use that as one of my indicators.  If that development can not get off the ground, trouble is still coming. 

I was surprised to see Hartford Insurance (HIG) increase its guidance this morning. Reuters

I do not own the common but one of my short senior bonds was issued by HIG so I monitor what is happening to the company.  

I am busy with other matters today. I am looking to buy a couple of bonds that I have not yet discussed provided they fall some in price.  

I also suspect that we will burst through 815 on the S & P 500 with gusto in the near future so I am suspending again my common stock purchases. If there is a realistic possibility that I can reinvest my cash flow by buying shares at much lower prices, then that is what I am going to try to do.  I am also considering adding to SHY.

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