Monday, April 27, 2009

Texas Manufacturing New Order Index Continues to Turn Up/ Inflation and College Costs/Emotional Trading In Investment Grade Corporate Bonds

For as long as I can remember, the cost of a college education, like medical costs, have increased at a faster rate than inflation.  When my much older, older brother started at Vanderbilt in 1964, the tuition was $1,100 for a year.  It was $2,200 during my first year at Tulane in 1969.  Today, for those having to pay full freight at a private institution like Northwestern, or possibly Brown, where Tyler will be going in the fall, the cost is close to $35,000 or just call it 50 grand with a little luck with the odds and ends. That is a pretty steep increase from the $1,100 45 years ago.  Maybe the bursar needs to pick a parent up by the heels and just shake everything out of their pocket.


My older brother, a confirmed dominant RB, has started writing a blog, and I will give a link to it to show what some call ying and yang, possibly an appropriate description when comparing the subjects of his blog and mine.  He has just written two posts and is writing a book, but the differences in our interests are apparent. Awaken to Truth


He was the recipient of the 55 Chevy and the subsequent RB type of decision to trade it for a Austin Healy that is used as an example of LB and RB decision making processes in this post: Left Brain & Right Brain Decision Making 

My main concern now is not whether we will pull out of this recession.  And, I would think that it is too early to make assumptions about the new swine flue strain possibly morphing into a Black Plague, as some humans are apparently doing by whipping themselves into a fearful state when such fear has no rational foundation-yet.  

I am no longer concerned about falling into another Great Depression Part II.  We came very very close however.

Instead, as I look out into the future, my major concern is inflation and the cost to service a U.S. budget deficit growing yearly in the trillions now when interest rates start to rise again, as they inevitably will do at some point. Within the past few months, this shift in concerns from an implosion in the financial system to the potential inflationary implications of the monetary and fiscal stimulus has caused me to buy bonds or bond like investments that have a measure of inflation protection.  No one can predict the future, but it seems like it would be prudent for me to start preparing for inflation, or even stagflation, while the market was still more concerned about deflation, thereby pricing securities with some inflation protection as if deflation, or nominal inflation, was the likely scenario for years to come rather than months or a year or two.

This led me within the past sixty days to start adding what I call synthetic floaters in Trust Certificate form, and adding last quarter and the 4th quarter of 2008 floating rate equity preferred issues.  I also re-entered my position in TIP and started a position in the ETF WIP.

I realize that any kind of serious inflation, or a significant change in inflation expectations from now when only modest amounts are being priced into the long treasuries, will wreck havoc on my fixed coupon long bond positions.

So I am therefore sensitive to paring that position at the first sign of trouble and to hedge it some with PST and TBT, the double short ETFs for longer dated treasuries. I sold some TBT recently after I received a good spike, notwithstanding that I know intellectually of the need to keep TBT shares bought at favorable prices as insurance against a fall in  bond prices caused by inflation.  

I also know that I will not change and will consequently try to trade the hedge for a profit rather than keeping it solely as insurance.  I knew better last year when I traded the stock index double shorts for a profit and consequently had none in place after the Lehman failure. But that is just the way it is, one has to play the cards that are dealt rather than the ones that you would like to have. I am just in a trading mode when it comes to the double shorts.

Apparently, I am also in a trading mode for the ETF for investment grade corporate bonds, LQD. This ETF is very volatile considering the nature of its components, higher grade corporate bonds with an intermediate average duration. Over the past few months, I have bought and sold LQD twice, with both buys occurring in the 90 and change level.  

I believe that my reasoning is at least partly psychological. By generating gains on the price movement in this ETF, I am more likely to hold onto individual holdings of investment grade corporate bonds that have a higher yield. These are the posts summarizing those transactions:

I am also playing what appears to me now to be a volatile and fluctuating pricing based on emotional reactions on the credit quality of investment grade bonds which have created unusual spreads to comparable treasuries. The apex in emotional pricing occurred last October. I would just point to a chart from FINRA that contains the pricing of the AT & T bond which is the underlying security in the TCs JZE and JZJ.  

The Federal Reserve of Dallas released its Texas manufacturing outlook survey that showed a slowing in the rate of decline in manufacturing activity. Texas Manufacturing Outlook Survey, April 2009 - Economic Data - FRB Dallas

The new order component rose. April 2009 Volume of New Orders- Texas Manufacturing Outlook Survey - FRB Dallas

I view the new order component of these type of indexes to be important.  ISM Index of New Orders 

I am in a wait and see mode today.




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