1. Unemployment and Inflation: A rise in inflation and unemployment can occur at the same time and are not per se mutually exclusive. This is a link to the BLS unemployment rate numbers from 1948 through 2008: Bureau of Labor Statistics Data This is a link to a graph chart of the misery index broken down month by month: The United States Misery Index By Month The misery index was higher in 1982 than now, and 1982 marked the start of a long term secular bull market. The difference is that both unemployment and CPI were high in 1982. The chart shows that rising unemployment can occur with rising inflation as shown by the twelve year period starting in 1970. By 1982, inflation was running hot and unemployment rate was at times higher than now.
Unemployment may serve to restrain inflation in the months to come. I would not anticipate now inflation to be a problem in 2010, and the market is certainly not anticipating a serious problem based on the pricing of longer term bonds and the TIP break-even point. The market is composed of fallible individuals who lack the god like power to divine the future with any degree of accuracy. Being one of the lowly human creatures, I can only say that I would expect inflation to run between 2 to 2.5% in 2010. The inflation problem will probably not occur all at once, but creep up slowly, set in motion by forces that are not fully understood by anyone including Uncle Ben and Alan Greenspan.
I would not expect worrisome inflation to appear all at once. It is more like a slow burn, waiting for more fuel to feed it before it starts to roar. It might take several years for a 1970s type inflation scenario to develop again.
I mentioned in a comment to a post ( Bought 50 of the TP KEYPRB) that the next buying opportunity for long term bonds might come near the end of 1970s style inflationary cycle. That cycle had its origin in the policies of the 1960s, gathered steam in the 1970s and finally was squashed in 1979 to 1983 by the Fed Chairman Paul Volcker. It would have been premature, to say the least, to have bought those long bonds prior to say 1981 when both the 20 and 30 year treasury bonds jumped to over 14% yields www.federalreserve.gov/ This would be a buying opportunity totally unlike the one presented in October 2008 to early March 2009 in corporate bonds. In the last buying opportunity, the opportunity was confined to a relatively narrow period of time, when the problem was not inflation but a fear of financial collapse. That collapse was either going to happen or it would not happen, probably in a relatively brief period of time. It would have happened if the GOP had had enough votes in Congress in September 2008. If the next buying opportunity comes due a repeat of the 1970s, a concern expressed recently by the President of the Philadelphia Federal Reserve, then the first reaction would be to pare long bond positions and then wait a very long time for the buying opportunity. There is such an animal as a long term secular bear market in bonds. If you are in one, you will know when the opportunity has finally arrived in your gut because there will be blood in the streets in bond land and it would take a lot of nerve ( and I really mean more than a lot) just to hit that buy button.
2. Bought 100 shares of a new ETF QAI at 27.45 Today (see Disclaimer): This is a relatively high cost ETF called the IQ Hedge Multi-Strategy Tracker ETF: IQ Hedge Multi-Strategy Tracker ETF The high expense ratio is caused by layering the expense ratio of the sponsor on top of the expenses of the underlying ETFs selected by the sponsor. The ETF seeks to track before expenses the returns of the IQ ALPHA Hedge Index, which attempts to duplicate the risk adjusted return characteristics of hedge funds. As of 9/30/2009, this ETF contained the following:
Ticker Name Weight
SHY ISHARES BARCLAYS 1-3 YEAR TR 24.48%
EEM ISHARES MSCI EMERGING MKT IN 24.42%
DBV POWERSHARES DB G10 CURRENCY 10.09%
AGG ISHARES BARCLAYS AGGREGATE 9.54%
VWO VANGUARD EMERGING MARKETS ETF 9.30%
BSV VANGUARD SHORT-TERM BOND ETF 8.08%
HYG ISHARES IBOXX $ HIGH YIELD COR 6.76%
SHV ISHARES BARCLAYS SHORT TREAS 6.19%
Short Exposure Ticker Name Weight
TFSZ9 RUSSELL 2000 FUTURES-10.31%
MCIZ9 MSCI EAFE FUTURES-8.41%
This data can be found at http://www.indexiq.com/docs/qai/factsheet.pdf. Right now, the ETF is heavy into short term bond exposure with the ETFs SHV, BSV and SHY.
So, I am just giving this ETF a test drive. I would assume the ETF will be actively managed on allocations and it appears to be at least on a quarterly basis: IQ ALPHA Hedge Index
3. Intel (owned): Bank of America/Merrill reduced its recommendation on a number of semiconductor stocks today, cutting Intel, TXN, LSI and MRVL to neutral from buy, and reduced several others from neutral to underweight. An article in Reuters contains a more detailed discussion of the reasons for the downgrades. I am content to hold onto Intel and to continue reinvesting the generous dividends to buy additional shares. So a price decline is fine with me since I will end up buying more shares at a lower price.
4. Bought 100 of the ETF XLU at $29.14 Today (see Disclaimer) & Bill Gross on Utilities : I do own a number of electric, gas and phone utility common stocks, and a few bonds and preferred stocks issued by those type of companies. To achieve a greater level of diversity, I bought 100 shares of the ETF for the S & P 500 utility stocks: Snapshot - Select Sector SPDRs This ETF contains 35 electric and gas utility stocks: Composition - Select Sector SPDRs Of the ones listed, I own common shares in Duke, Pinnacle, Consolidated Edison, Progress Energy, & Pepco. I also own GXP, based in Kansas, which is not part of the S & P 500, but is a component of the S & P 400. As with the other Select Sector Spiders, XLU has a low expense ratio at .21%: www.sectorspdr.com/shared/pdf/factsheets/FactSheet_XLU.pdf At my cost the dividend yield is currently around 4.2%: XLU Fund Quote - SPDR Utilities Select Sector ETF
I have been thinking of adding XLU to achieve more diversity, and I am an addict to diversity. It is better than being an addict to other things. I do not drink or smoke for example. What caused me to move off the fence today was the monthly newsletter from Bill Gross who made the case for owning utilities in what he describes as the new normal. This discussion is in his December 2009 Investment Outlook: PIMCO - Dec Gross Anything but .01%
Bill and I am concerned about bubbles being created with a prolonged period of zero rates on short term money.
I bought XLU in a new brokerage account at a firm that I previously had only an online savings account. Back in October, I bought some CDs from this bank, which was very easy to do online, and my yields were between 3.75% to 4.5%, with the terms expiring at 9, 12, 18 and 24 months. Those were bought in reaction to the 3 month Treasury bill rate falling last October to very unattractive levels, so I redeemed those at maturity and bought the higher yielding bank CDs. CPI and CPI Floaters-OSM/CDs v Treasury Bills in Dynamic Asset Allocation/ Numb to bad news CD rates falling Trust Certificates PJL and XFL: Verizon Bond(1st paragraph of that original post)
Some of those CDs have matured and the new rates were not enticing enough to me. So after the bank offered a $50 bonus for opening a brokerage account, I opened one and used some of the cash sitting in savings to make the XLU buy earlier today. The savings account pays interest that is okay in the current environment of artificially low and abnormal short rates, somewhere around 1.35% currently. The bigger cash problem is in the money market accounts where the rate is as Bill Gross notes hovering at or just above zero. Fifty bucks is a lot of money to the LB who picked a penny off the pavement at Kroger's today.
5. Mortgage Bankers Report: The Mortgage Bankers Association ( MBA) reported today that 14% of homeowners with mortgages were behind on their payments or in foreclosure. The last survey by the Census Bureau estimated that the number of housing units in the U.S. without a mortgage stood at 23,875,803United States - Financial Characteristics for Housing Units Without a Mortgage The number with mortgages was estimated at 51,487,282: United States - Financial Characteristics for Housing Units With a Mortgage This is an interesting interactive map showing the percentage by state of homeowners who are spending more than 30% of their income on monthly owner costs. You can check the numbers by zip code or even by street which is a little scary. Look at how high the numbers are for California, Nevada and Florida in this table from the Census Bureau, three of the epicenter states for the mortgage meltdown: United States by States; and Puerto Rico - GCT2513. Percent of Mortgaged Owners Spending 30 Percent or More of Household Income on Selected Monthly Owner Costs
Universe: Owner-occupied housing units with a mortgage
Universe: Owner-occupied housing units with a mortgage
6. Leading Economic Indicators: The Conference Board reported that its index of leading economic indicators rose .3% in October.
7. OSM (OWNED): I noticed this afternoon that OSM declared its interest payment at $.0106 for December. This would be $.1272 annualized or a tad over .005%. As I have discussed, this security pays interest monthly based on a 2% float over a CPI computation that covers a one year period with a lag, and I expect several more months of low penny rates due to the negative CPI readings late last year. I also have concerns about Sallie Mae surviving to pay par value in March 2017. If SLM does survive, the return would be excellent based just on the share profit. This is how I believe SLM calculated the December payment for OSM:
NSA CPI AUGUST 2009 215.834
NSA CPI AUGUST 2008 219.086
DIViDED BY 219.086= -.014843
ADD THE SPREAD= +.005156
Voila a 1/2 of 1% annualized
The rate will change every month, and the data is available now to do the calculation as far out as the period ending on 2/15/2010:
The following is my calculation for February 15, 2010 which still has the low 2008 CPI numbers due to the lag imbedded in the OSM computation:
NSA CPI October 2009: 216.177
NSA CPI October 2008: 216.573
Divided by 216.573= -0018
Add the spread .02%= .01817%
So by February, even with the negative number from last October the monthly interest starts to turn more positive. But just for fun, and the LB considers this to be a form of fun for it, I will assume that the CPI readings for both November and December 2009 are unchanged from the level of October 2009 at 216.177 and see what effect that would have on the penny rate for April 15th 2010:
December Hypothetical NSA CPI of 216.177
NSA CPI December 2008: 210.228
difference: + 5.949
Divided by 210.228=.028297 + .02 spread=.048297% based on an assumption of flat CPI numbers for the next two months. This would be for the April 2010 payment. At a $12.5 total cost for the shares, that would be worth twice as much.
The RB said that, if it has to sit through another one of these calculations, it will go on strike and never come back to work. This is worse that when the LB reads the Internal Revenue Code for its own amusement.
8. Bought 30 shares of ZBPRC at $18.4 (see Disclaimer): I do not have a positive opinion of Zions Bancorporation. It would be hard to justify to me the decision to bankroll the obvious bubble in real estate in the Arizona and Nevada markets. I thought that the 3rd quarter report was horrible. In fact, I sold the 30 shares of ZBPRC held in the regular IRA immediately after its release in October Sold ZBPRC/Hedging Bond Positions Since that report, ZBPRC has fallen about 3 bucks from where I sold those 30 shares, and I view the decline as rational. I did not buy the 30 shares back in the retirement account since it has become too speculative for the IRAs. I view it as extremely speculative.
This security is a non-cumulative perpetual equity preferred stock which are three good reasons to be cautious. I found the yield too tempting today to completely ignore it however. The coupon on this security is 9.5% with a $25 par value: Prospectus Supplement It can not be redeemed prior to 9/15/2013. Assuming Zions survives and is able to recover by 2013, this high coupon security might be a candidate for a call at par value, assuming also that interest rates are sufficiently low for Zions that it could refinance at a significantly lower rate. Quantum does list the dividend as qualified: 15% Tax Rate Table Yesterday, I noticed that Zions declared the regular dividends on both of its equity preferred stocks. I own both of them now, with the buy of ZBPRA made in May at $7.8. Bought 100 ZBPRA at $7.8/ As long as Zions keeps paying that 1 cent common share dividend I have to be paid. If it eliminates that dividend, it will have to suspend the government's preferred dividend in order to eliminate the dividends on ZBPRA and ZBPRC. (see item # 7 Bought 50 ZBPRB in Roth at $19.9) As a practical matter, I would anticipate that an elimination of a 1 cent common share dividend to show extreme distress, and Zions management would have to know that would be the perception. So if they eliminated that one cent, I believe that the announcement of such an elimination would be accompanied by a notice of deferral for both the government's preferred dividend and the interest on junior bonds and the elimination of the equity preferred dividends. In other words, a very bad situation would be the diagnosis. And that is the risk.
The yield at a total cost of $18.4 is about 12.9%- ZB.PRC Stock Quote
9. SOLD 100 Yamana Gold (AUY) at 14.20 Canadian Dollars (see Disclaimer): I prefer to own gold bullion to owning a gold miner. I also wanted to increase my holding in Canadian dollars. So I sold my remaining shares in AUY and settled the trade in the Canadian currency. The hedge that I recently bought for my gold holdings, the double short ETF GLL, is not much of a hedge considering what I own, so I have decided to increase it in increments to make it somewhat more meaningful. I will buy 50 shares on a decline to 8.60 to 9 range, and another 50 on a decline to 7.60 to 8. I will continue to use it as a hedge for as long as the price remains over $6, modifying some my earlier downside limit which had been $7. I am just not comfortable with gold at the current levels. I wish that I could sell some but that is not going to happen. I always view paring to be the best hedge. But I will not even go into the bank for fear that I may pull some out to sell. So I have to deal with the LB psychology and that explains the GLL buy: Bought 50 GLL Also I share the view that the Canadian Dollar is a commodity currency, most likely to rise in a bull market for natural resource commodities, and it has already enjoyed a good run since March against the dollar as shown by the chart for the currency ETF, FXC .
I will just use my Canadian dollars to buy Canadian stocks on the Toronto exchange. Someday, I may convert it back to U.S. dollars if that makes a lot of sense. For now I have about 10 grand in foreign currency sitting around doing nothing and earning nothing in my main taxable account. It does fluctuate up and down in value.