Monday, June 6, 2011

Jobs/Sold 1 Selective Insurance 6.7% Bond Maturing 2035 at 96.875/Added 50 ADX at 10.95/Exchange Traded Bond and Preferred Stop Table

The Google Search box has not been working for about five days, and apparently this is yet another worldwide problem on Google's Blogger site.

The economy added only 54,000 jobs in May, much lower than the consensus forecast of 125,000 that had been revised down from 175,000 after last Thursday's anemic private payrolls report from ADP.   Over 6 million people have been out of work for more than 6 months, and 13.9 million are currently unemployed according to government. Employment Situation Summary 

The total unemployed, which includes those working part time involuntarily and those marginally attached to the work force, stood at 15.8%. Table A-15. Alternative measures of labor underutilization  Payroll data for the prior two months was revised down by 39,000. Over the past year, the government claims that hourly earnings have increased by 1.8%, which would be insufficient to keep up with the cash inflation increase. The hope is that bad weather and disruptions linked to the events in Japan have caused a temporary deceleration in job gains.  I see no compelling reason to be optimistic at this point.

The Chief Economist for the National Association of Independent Businesses said on 6/2 that meaningful job creation on Main Street has collapsed. NFIB Jobs Statement: On Main Street, Job Creation is Collapsing | NFIB

Ultimately, an investor has to explore and answer a few questions for themselves.  After such an extraordinary amount of fiscal and monetary over the past two years, unprecedented in modern history, why is the economic recovery so weak in developed nations?  The Federal Reserve has engaged in two massive quantitative easing campaigns and has kept the federal funds rate near zero since December 2008.  FRB: Press Release--FOMC statement--December 16, 2008 (historical rates can be found at  FRB: H.15 Release--Selected Interest Rates--Historical Data)

The U.S. government has thrown massive amounts of borrowed money into the economy. Even if the Fed keeps short rates near zero until the end of 2012, which many now believe is possible, why would another year of abnormally low rates, accompanied by cutbacks in spending at all levels of government, produce a sustainable economic recovery, when two years of extraordinary stimulative fiscal and monetary policies have produced what can best be described as an anemic, fragile and increasingly vulnerable recovery?

Many argue that cutting taxes for the wealthy and freeing industry from regulation will lead to a sustainable economic recovery in the U.S. Unfortunately, that tired refrain has another purpose other than dealing with the actual problems, and fails to address what actually happened after the Bush tax cuts and the abolition of many regulations during Bush's term, particularly financial regulations of investment banks. (See WSJ Article from 2009: Real Time Economics : Bush On Jobs: The Worst Track Record On Record; WP article lost decade for U.S. economy, workers;   A Lost Decade for Jobs & Income Growth Adjusted for Inflation (January 2, 2010 Post);

There are powerful forces or reasons, restraining a resumption of a sustainable economic recovery, which are incapable of being addressed by members of either political tribe.

One important reason for the anemic recovery, notwithstanding unprecedented stimulus, is the deleveraging process from excessive debt in developed nations and the absence of anything to replace the Age of Leverage, where growth in developed countries was largely the result of spending ever increasing amounts of borrowed money.  What Will Produce Growth after the Age of Leverage? (September 2009 Post);  Underlying Cause of the Current Long Term Bear Market is Too Much Debt

I would date the Age of Leverage as starting around 1985 and ending with a massive thud in 2007. During that period, growth in developed nations was largely based on both consumers and governments spending exponentially increasing amounts of borrowed money. The increasing leverage for consumers was in part an understandable response to their wages failing to keep pace with inflation, thereby requiring them to increase their debt in order to maintain a lifestyle that they wanted.

By 2007, the ratio of household debt to disposable income hit 133%, after meandering for decades at around 60%. (see figure 3: The acceleration in that ratio began in 1985, at about the same time as President Reagan vastly increased the federal government's deficit spending.  In 1982, the U.S. national debt was at $1.137 billion and had increased to $3.206 billion in 1990. National debt by U.S. presidential terms - Wikipedia  Debt to the Penny (Daily History Search Application The borrowing and spending binge began in earnest under Reagan and continued until the implosion in 2008.  The later phases of that borrowing binge created an illusory form of growth.

Another fundamental problem now is a lack of a new innovation revolution, sparking widespread employment  and productivity gains. The productivity revolution ushered in by computers began in earnest during Reagan's presidency. That innovation revolution is rarely mentioned, if ever, by those who wish to elevate his importance to an economic recovery in the 1980s. This quick and widespread technological revolution spurred increases in productivity, created literally millions of jobs in a variety of industries over a two decade period, and ultimately led to the creation of the Internet creating even more jobs. That period of growth, spurred by the "computer revolution", has largely run its course, at least to its importance as a driving force in job creation.

Earlier innovation revolutions that had similar, far ranging impacts on productivity and job creation include, for example, the innovations in the generation of electric power, which drove down the average cost of electric power for several decades (an extremely importance development), accompanied by the near in time innovations in the mass production of automobiles and the widespread adoption of the telephone.  These innovation revolutions generally are grouped in clusters and have far ranging impacts on productivity, job creation, communication and logistics/distribution.

In a few years, the best hope for a road to sustained economic growth does not reside in the U.S. or other highly indebted, irresponsible nations. Instead, the increased spending by a growing middle class in Asia, outside of Japan, India, South America and even Africa will be the engine of growth. And, increased spending on infrastructure development in those nations (e.g. power plants, water and sewer, roads, bridges) will spur growth even more. For example, India has grown in population by about 200 million in the past decade to over 1.1 billion, with about 1/2 of the population now between the ages of 2 and 29. The average rate of growth for India's economy per year has been over 7% since 1997.

The transition period from a U.S. led recovery to one led by the emerging nations is already underway, but may take additional time to pick up the slack left from the slower growing, excessively leveraged, developed economies, mostly led by uninspired leaders believing in out-of-date and clearly erroneous cliches. What Will Produce Growth after the Age of Leverage? (September 2009 Post)

I have previously stated my best guest is 2013 when that transition will start to pick up a clearly observable head of steam. If that guess proves omniscient, then the U.S. stock market will likely remain in a long term secular bear market for awhile longer.

Unlike everyone else, I date the start of the long term secular, stock bear market in October 1997, when the problems of excessive leverage first started to appear. Dating the Start of the Current Long Term Secular Bear Market The Roller Coaster Ride of the Long Term Secular Bear Market  Going back to 2009, I thought that the start of the new long term bull market would start around 2013, possibly as late as 2015, with the S & P 500 somewhere in the 950 to 1250 range, near where it was in October 1997.

The definition of a long term bear market is a lot of up and down action, a series of short term cyclical bear and bull markets, ending up going nowhere over a long period of time, usually around 15 years, unless there are substantial policy mistakes that turn a recession into a Great Depression.  Those policy mistakes made by the Federal Reserve and Congress after the 1929 market crash, which most members of the GOP wanted to repeat in the summer of 2008, were fortunately not made again.

These two posts contain charts of what long term bear and bull stock markets look like: More on 1982 or 1974 (Charts of 1982-1997 long term bull; chart of 1965 to 1982 long term bear; Chart of current long term bear through post date in September 2009)  LONG TERM SECULAR BULL PATTERN 1950 TO 1966 (Chart of long term bull market from 1950 to 1965; and Chart of Long term Bear starting in 1929) (see also:  Long Term Secular Bull and Bear Markets 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009 Post)

During the bear secular cycles, the buy and hold investor will lose about 1% to 1.5% per year after inflation by investing  in the S & P 500 index after reinvestment of the dividends.  During the long term bull cycle, and this is scary in its repetition over the past century, the annualized return would average about 14% to 14.5% after inflation with reinvestment of dividends.  I last did these calculation in a post dated in March 2010: The Roller Coaster Ride of the Long Term Secular Bear Market

The beginning of the next bull market will have nothing whatsoever to do with the political party in power in the U.S., the GOP's promise of economic nirvana by granting even more tax breaks to billionaires and fewer regulations, or the Democrats attempt to create long term jobs by spending ever increasing amounts of borrowed money.

More time is needed to heal the underlying problem that caused the Near Depression, for consumers and governments in developed nations to deleverage, and for the emerging nations and consumers to grow sufficiently to offset the lack of growth potential in major developed nations, including the U.S., Japan, and most of Europe.  And, the U.S., the leader in innovation irrespective of the party in power, needs to pick up the pace of finding the next big wave. 

When the market rallied mid-day on Friday, I added another double short ETF to increase a partial hedge on my remaining stock portfolio.  My activity for the next several weeks is likely to be very limited, as I hoard the cash that I have built up, waiting for a better understanding of whether the current downturn is merely a pause or the beginning of a longer term downturn.  I believe the weight of the evidence at this time points to the downturn, and the markets have yet to accept that scenario as more likely than the pause scenario.   I would be more comfortable if the S & P 500 was around 1150 now, as far as initiating any meaningful new stock positions.

1. Sold 1 Selective Insurance 6.7% Senior Bond Maturing in 2035 at 96.875 on Friday (see Disclaimer):  This bond was bought in the regular IRA.  While it is investment grade, the coupon is low for me given its long maturity. I bought the bond recently at 89.5, realized a gain of $57.75 plus some interest.

2. Added 50 ADX at 10.95 on Friday (see Disclaimer):  I believe ADX is nothing special.  Its main attractions are the usually discount to net asset value and the stock selections leaning toward large cap value.  Over time, the fund will come close to performing in line with the S & P 500.  It has outperformed the index for five of the last 10 years.  So, I mainly view it as a way to simulate the performance of the S & P 500 over time, to buy that performance at a 15% or so discount on average, and to reinvest the dividends and capital gains distributions to buy even more shares at a discount.  I would not regard the managers of this fund as stellar or even close to being stellar.  Average is a more appropriate description for their abilities.  But, they do not try to shoot the lights out by investing in stock with high betas and P/Es.

The fund closed last Friday at a -14.42 discount to its net asset value per share of $12.9 per share.  The expense ratio is around .58%.   CEFA

This fund has been around for a very long time and survived the Great Depression.  This is a link to its web site: Adams Express Company

This is a link to the 2010 Annual Report filed with the SEC: ADAMS EXPRESS COMPANY - FORM N-CSRS - DECEMBER 31, 2010 The dividends and capital gains distributions since 1996 can be found at page 20.

The last filed Form N-Q, which contains a list of holdings as of 3/31/2011, can be found at ADAMS EXPRESS COMPANY - FORM N-Q - MARCH 31, 2011.

The main reason for adding shares last Friday was that the VIX was not confirming the down move in the market.  I will frequently add to a fund when this occurs.  The S & P 500 closed down -.97% on Friday, so I would expect the VIX to be up.  Instead, the VIX fell .77% to close at 17.95.  I also believe that it is important that the VIX has consistently been moving below 20 since March 23, 2011:   ^VIX Historical Prices The VIX is still in an Unstable VIX Pattern, which does necessitate some caution.  Vix Asset Allocation Model Explained Simply The VIX has been in an Unstable Pattern since August 2007: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern  I would add that the formation of a Stable Vix Pattern would require me to increase my stock positions even if I do not want to do it.

3. Current Exchange Traded Bond and Preferred Stock Table:  I have lost a lot of bonds to calls since I last posted this table.  I have also taken some profits on lower yielding securities.  This part of my portfolio has gone up some in value, as the market averages have declined by close to 5% over the past five weeks.  I have not included in this table my shares of UZV, a senior bond from U.S. Cellular, that is about to be called by the issuer.   In my classification scheme, I view trust preferred, trust certificates and "baby bonds" as exchange traded bonds.  Exchange Traded Bonds  I have lumped into that asset category a few equity preferred stocks, which are not bonds, since I view their bond characteristics to be for more dominant than their equity attributes.

Exchange Traded Bond and Preferred Stock Table as of 6/3/2011

Most, if not all of the recent bond redemptions, have ended up in my growing cash allocation, waiting for better opportunities to redeploy.  When I last posted this table on April 19,  EXCHANGE TRADED BOND TABLE, the value was $135,332. Due to calls and voluntary dispositions, the value has fallen to $101,274.  The prices of the remaining securities have risen slightly or held their values, while making their distributions.  

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