Monday, January 11, 2010

Consumers Repairing Their Balance Sheets/AMAT/GS on 2010/UPS/Target Date Muni ETFs/Volcker/VIS-Industrial ETFs

1. Applied Materials (AMAT) (owned): Needham upgraded AMAT to buy based on its belief in a strong cycle recovery. Needham's price target is $18. I own just 50 shares bought last September at $13. Bought 50 AMAT at $13/Bought 50 STIPRA at $17.2 Most likely, I would be a seller before the price reached $18.

2. China Exports and Imports: China's imports surged by 55.9% in December year over year, while exports increased 17.7%. Both figures were well in excess of expectations. Reuters The forecast for exports was just 4%. The export number is another indicia of a healing world economy.

3. Record Decline in Consumer Debt in the 3rd Quarter of 2009 & a Steep Decline in Consumer Credit for November: Household debt fell by a record amount in the third quarter, falling 2.5% on an annualized basis, according to a Federal Reserve report released on 12/10/09. Home mortgage debt fell at an annual rate of 3.5% while consumer credit contracted by an annual 3.25% . Last week the FRB reported that consumer credit fell 8.5% in November, with revolving credit falling at a 18 1/2% annualized rate. Total borrowing fell for November fell 17.5 billion, more than the five billion decline predicted by economists. NYT Consumer credit card borrowing fell by 13.7 billion during November which represented a 8.5% fall from October. The BEA reported last month that the savings rate as a ratio of disposal income was 4.7% in November: News Release: Personal Income and Outlays, November 2009 All of this data, when taken together, tells me simply that the average American household is saving more, spending less, and cutting back on their borrowing some. I would view such actions to be part of the normal repair process of the consumer's balance sheet that became overextended with debt during the last decade. It also suggests that the recovery from the abyss will be a slow one since the Near Depression was caused by an improvident extension of credit followed by a severe credit contraction and a continuing deleveraging process. 2010 The Year of Debt Deleveraging Deleveraging the U.S. Economy

4. UPS (not owned): UPS raised its profit forecast for the 4th quarter by 15% and also announced 1800 job cuts. This seems to be a trend among many firms that will result in better profits in 2010 but a slow recovery in hiring.

The usual downbeat, worse case scenario imaginable view of the recent employment report is provided by the resident ghoul at A more optimistic and balanced view is presented by Robert Johnson at Morningstar.

5. Goldman Sachs on 2010: This is a link to the Goldman Sachs portfolio strategy for 2010. The firm anticipates the S & P 500 will rise to 1300 by mid year, and tail off to 1250 by year end. I certainly would like to see the S & P 500 come close to 1300 by mid year. I would, most likely, be lightening up into that kind of move.
I am having trouble identifying what will replace the Age of Leverage as the medium for sustainable growth. My current thinking is that a growing middle class in the developing world may provide the oomph needed, but that may be a few more years into the future.

6. Volcker: I could not agree with Paul Volcker more when he said recently that the only innovation made by Wall Street over the past 20 years was a cash machine to line their own pockets. Volcker added that he was unaware of any neutral evidence that the so called financial innovation had led to any economic growth. Those responsible have not been accountable and nothing of consequence will be done to prevent a similar or worse crisis from happening again. And who could disagree with the comment made by John Reed that people have learned nothing from what happened. NYT

7. VIS-Vanguard ETF for U.S. Industrial Stocks: I gave some thought over the weekend about what I will do with the 100 shares of ETF bought last year at $42.46. In a previous post, I mentioned that I wanted to sell it and transfer the proceeds into another 100 shares of VTI or VV. I have decided to go with another 100 shares of VV, the Vanguard ETF that focuses on large cap U.S. firms.Vanguard - Vanguard Large-Cap ETF Overview The expense ratio of this ETF is meager at just .13%. I bought 100 shares of VV back in May 2009 and have been reinvesting the dividends. BOUGHT VV at $41.45 It just seems to me that the large capitalization U.S. companies are better values now than an ETF which includes smaller firms. The next issue was when do I sell VIS. I will have to wait another seven months or so for the gain to turn into a long term capital gain. I still expect industrial stocks to be one of the leaders in the recovery, and I would anticipate more appreciation in that sector over the coming months than consumer staples and utility stocks, two other sectors where I have significant investments. My inclination now is to make the switch when and if VIS gains 10% or more compared to VV, using the starting prices at beginning of 2010:

VIS 1/1/2010 $51.58 Now 1/8/2010 $54.26 +5.916% VIS VANGUARD IND ETF
VV 1/1/2010 $50.67 Now 1/8/2010 $52.08 +2.78 % VV VANGUARD LG-CAP ETF

So in the first week, the out performance of the industrial ETF was 3.136%. Preferably, I would want to wait until VIS is held for at least a year.

8. The Out To Lunch, Elmer Fudd Syndrome: Members of the GOP tribe, and their publicists at Fox, were quick in their efforts to make political hay out of Umar Farouk Abdulmutallab's effort to blow up a plane on Christmas day. Ultimately, it was simply a failure of individuals to do their job. Maureen Dowd furnished me with some interesting facts about this episode in his column: NYT When Abulmutallab's father gave an explicit warning to embassy officials in Nigeria, the state department employee incorrectly misspelled the terrorist's name, thereby leading to the false assumption that he did not have a U.S. visa. Then, border security officials figured out that he was on board the plane and had extremist ties, and did not alert the pilot of the plane. Instead, they made the decision to question him after the plane had landed. You can spend tens of billions of dollars, create the most streamlined fact sharing apparatus known to man, and it still requires individuals to do their job, to remain alert and focused, and to act intelligently.

9. Ideology and the Warping of Reality: A frequent topic of this blog is how individuals distort events, frequently unconsciously, to fit within a pre-existing ideological framework. It is something that I notice multiple times throughout every day. An example would be an editorial in Sunday's Tennessean by an economics professor at David Lipscomb college, who views government interference in the economy as the cause of the Near Depression, blaming for example Community Reinvestment Act in an oft-repeated refrain among self styled "conservative" ideologues. {Ideologues on A Mission: Revisionism Already Well Under Way to Explain the Origins of the Mortgage Crisis; Conservative ideologues: Blame it all on minorities; Items # 1 & 2 LIBOR} I know all that I need to know about him after reading a few sentences in that column. No amount of factual information can convince a closed mind of error, since any information inconsistent with the pre-existing worldview is viewed as unreliable and/or irrelevant, assuming it is even known which is highly unlikely. Ideologues only seek out information that confirms their worldview, and will generally make a conscious effort to avoid any contact with inconsistent information. And, they will rarely if ever challenge one of their beliefs.

Unfortunately, ideologues are frequently in a position of power in both business and government. Any good result from their decision making process will be by chance, a totally fortuitous event, sort of like when I give my magic coin the right to decide whether to sell or to buy a stock.

One of the know nothing, political ideologues was mentioned several times last night in a 60 Minutes minutes story on a book about the 2008 campaign called "Game Change". Ignorance can be bliss, even viewed as a virtue by millions of Americans, and I can understand why her legions of supporters would not care that she had no idea why there were two Koreas, as just one example. Possibly more troubling for those who claim to be so keen on moral issues, she was easy to spot as someone who had trouble telling the truth, even when the truth was obviously to the contrary. I would call her pathological in that respect. And this 60 minutes story just highlights a few examples from the campaign.

There is a tendency among the true believers to create their reality, which is then believed without question, and to never learn much of anything from the past. Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology fail to remember or refuse to learn? Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent?

10. Target Date Bond Funds/ iShares - iShares S&P AMT-Free Municipal Series : One of the problems with bond funds is that most of them lack a maturity date. In a period of rising interest rates, it is important to at least have the option of holding an individual bond until maturity to receive your principal back. A bond fund with no maturity date does not promise to pay you the original amount of your investment. One bond fund alternative, which I am looking at now, are the target date bond funds. In these funds, the bonds held by the fund will mature by a certain date, whereupon all of the holdings would be in cash. This makes the fund similar to holding an individual bond, except the fund adds diversity. Ishares has just launched 6 ETFs containing AMT Free Municipal bonds, with maturity dates ranging from 2012 to 2017: iShares - iShares S&P AMT-Free Municipal Series The expense ratio is modest for these funds at .3% (see e.g.: iShares 2017 S&P AMT-Free Municipal Series (MUAF): Overview ; iShares 2016 S&P AMT-Free Municipal Series (MUAE): Overview; iShares 2015 S&P AMT-Free Municipal Series (MUAD): Overview)

This is a link to the current holdings of the 2015 fund: us.ishares.comapplication/pdf The index had 17 holdings as of 1/7/2010. If I buy something like this security, the emphasis would be on preservation of capital. The income generation would be negligible and there is still a risk of loss associated with one or more of the securities in the portfolio going to zero before maturity. I would certainly view owning one of those ETFs as preferable to owning a municipal bond fund now, with no maturity date. I do own two such funds. I own a good chunk in the only mutual fund that owns just Tennessee municipal bonds, which gives me income free of both federal and state taxes. TNTIX - Mutual Fund Quote for Dupree TN Tax-Free Income I could probably do better by buying individual bonds, but quite frankly I have better uses of my time. Tennessee does not have an income tax per se but it does have a 6% tax on dividends and interest after a small exemption, and would consequently tax interest paid by non-Tennessee municipalities. So, as an example, I have to pay a state tax on the non-Tennessee portion of the dividend distributions from the Vanguard Intermediate Tax Free Fund. VWITX Vanguard Interm-Term Tax Exempt So, I would view the 2017 Ishares fund to be an alternative to my VWITX but not to the Tennessee tax free bond fund. And, when I start to sell my LTs or stocks bought pursuant to the 2010 Speculative Strategy, I may use the proceeds to buy one of these funds.

11. TEN YEAR TIP AUCTION TODAY: The treasury will be auctioning a ten year tip on January 11, 2010. The current expected coupon yield is around 1.35%. The coupon rate will be decided of course at the auction. I can place a non-competitive bid via my broker, who will not charge a commission, and I will not be buying any due to the low coupon rate. I have decided to refrain from buying until the 10 year TIP coupon rate exceeds 2%. The maturity date for the 10 year TIP note to be auctioned Monday will be 1/15/2020. The coupon rate is constant throughout the 10 year period, but it will be applied semi-annually to a principal value adjusted by CPI both up and down. Simply put, the principal of the bond increases with inflation and decreases with deflation. By buying the bond directly from the government at auction, I am guaranteed to at least receive my principal back, plus some interest, assuming Uncle Sam is able to pay me, even if the entire 10 year period is marked by deflation. The value of the bond is increased by CPI and decreased by a negative CPI number. Advantages and Disadvantages of Treasury Inflation Protected Securities:

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