Saturday, March 21, 2009

Dynamic Asset Allocation Trumping Trading Rules/Oops Forgot about 55 million/Earnings Yields for Recent Stock Purchases

I check the yields of money market funds once a week, usually on Saturday, just to see what some of my cash allocation is earning and the answer is not much. Actually, based on the way that I look at it, it is earnings less than nothing. Most taxable money funds are yielding less than 1% now and the government funds are hovering at 1/4% or below. The Vanguard Prime, which has a low expense ratio, is just a smidgen above 1%. Here are some links to the pages from Barron's that lists some of the current yields.Barrons Free Tables Page 3 - Barron's Online - Weekly Mutual Funds -Taxable Money Market Funds - Barron's Online - Weekly Mutual Funds - Taxable Money Market Funds - V

I did manage to lock in some CD rates at above 4% in the 4th quarter of last year. Overall, however, the after tax inflation adjusted returns of my cash assets is certainly negative, which in itself is causing more risk taking now and is one of the causes of my frequent and flagrant violations of my trading rules.  I am being forced into taking more risks. When I do my allocation, I do not include in my cash allocation living expenses for about two years. VANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD The cash allocation is the money available for the purchase of securities.  

Most of what I have been doing recently is consistent with my dynamic asset allocation method that I have been practicing my entire life and discussed by me in several posts.

One of the time honored rules, forgotten by many over the course of this decade, is the 28/36 rule.  NYT   

At the height of the  housing bubble, about 9.17 million homeowners were spending more than 1/2 of their Gross Income before taxes on housing costs. The 28/36 rule says to limit housing costs (mortgage payment, insurance & property taxes) to 28% of gross income and limit total debt to 36%. For a margin of safety, I would use net income and have at least a 6 months cushion to pay expenses in the bank. The number of families who are one or two paychecks away from financial ruin is just staggering.

The number of car loans in arrears hit a ten year high last quarter. CBS News
Banks repossessed 1.6 million vehicles last year. 

Two large credit unions were seized on Friday and placed into conservatorship which together had over 50 billion in assets.  Yahoo! Finance

It will be interesting to see whether private equity trusts the government enough now to participate in Geithner's public/private partnership to buy bad assets. 
If the market views this to be a credible plan, we could see a continuation of what Alan Abelson called a bear market rally in his column in this week's Barron's.  But Alan has called every rally in his life a bear market rally.  Whatever, I will continue adding some consumer stables next week to my personalized ETF. 

Eric Savitz, someone I generally use a contrary indicator, says sell the semiconductor companies.  He quotes extensively from an analyst, Daniel Berenbaum, who says Intel is his best short idea.  Intel closed at $14.58 last Friday.   I have added Intel to my portfolio, with a couple purchases last quarter, and I am close to even on it. I am also reinvesting the dividend.
 I am not thinking about what the stock may do this quarter or even this year, but what is an attractive price for a 3 to five year hold.  I did add a nibble on EBAY after Eric was so negative on it last week.   It is hard for me to be too negative on that company at 11 dollars a share with all of its cash and a viable business to boot.  

After everyone got all upset about the 165 million in bonuses paid to the Masters of Disaster at the AIG Financial Products Unit, it has turned out that this figure was a tad off.  But, I understand that when you start throwing around figures like 180 billion it is easy to forget about 55 million extra paid to the wizards. 
Who can remember 55 million from last week?  If it is not a trillion, I do not want to even hear about it.     

Many of the stocks that I have added over the past few weeks are contained in the Barron's list of 56 stocks with high earnings yields and "compelling values"
I will look at earnings yield as one of many factors.  Most of these purchases were discussed in my posts.   My recent purchases that are included in Barron's list include Conoco, Microsoft, Duke Energy, Medtronic, Walt Disney, Proctor and Gamble, and Coca Cola.  Others that I bought in the 4th quarter of last year include Emerson Electric, News Corp, Walgreens, and Google.  I also own small positions in Bristol Myers and EMC.  Of the remaining stocks on Barron's list, I am considering a purchase only of JNJ, Schlumberger and Baxter.  Of those stocks, I am reinvesting dividends in Duke and Emerson. 
My last nibble on Medtronic was on 3/6 south of 26. 

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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