Monday, June 13, 2011

MTY Down to the Wire/Current Status of the Vix Asset Allocation Model/Illiquidity for the Small Investor in the Bond Market

The Google Search Box is working now, so I restored it. It is located to the right at the top. I view that search to be the best way to find anything in this blog which now has close to 1500 posts.

The entire staff here at HQ enjoyed watching the Coen brothers' remake of True Grit starring Jeff Bridges as Rooster Cogburn. YouTube - 'True Grit' Trailer HD

LB saw a kindred spirit in Mattie Ross, played by a promising young actress Hailee Steinfeld.

LB hoped that Mattie, another highly developed LB, would come to work at HQ, providing the LB with the much needed, effective assistance so lacking with other current staff members, who are of course nothing but dead weight for the LB to carry. Usually those worthless staff members, sometimes referred to as the Nit Wit and the Old Goat, are no more than a noise and nuisance problem for the LB, forever serving up a potpourri of brain dead distractions and inanities, while constantly attempting to interfere with the implementation of LB's logical and rational plans. With the RB and OG, it is sort of like listening to Michele Bachmann talk gibberish all day which just caused the LB to cringe. So Mattie has an open invitation to start working here at HQ. 

The P.M. London Gold Fix last Friday, 6/10/11, was $1529.25. The current annual period for the "principle protected' unsecured senior note MTY ends with the London P.M. fix on 7/27/2011: Stocks & Politics: MTY While I would be surprised to see this note make it to 7/27 without suffering what I call a maximum level violation, I would not be shocked to see it stay below the maximum level of $1576.80. The payday will be a good one without a maximum level violation since the price of gold is up a lot from its starting value of $1168. A maximum level violation of course triggers a reversion to a 3% coupon on the $10 par value, irrespective of where gold closes on 7/27.

Bloomberg provides charts on the Case Shiller Index of home prices. The composite for the ten metropolitan areas shows prices starting to move back down last September.

Shiller told a Bloomberg reporter than another 10% to 25% decline in home prices over the next five years would not surprise him, but he also emphasized that the U.S. housing market is in uncharted waters. And, it is possible that home prices may stabilize but start to decline in real terms, after adjusting for inflation.

Citigroup notified over 200,000 credit card customers late last week that hackers had stolen information in May.

I work under the assumption now that all financial institutions can not be trusted to provide adequate security for my accounts. This problem is occurring with increasing regularity, based on news reports, and I suspect that some incidents have never been reported by the financial institution who have had a known unauthorized intrusion. Another assumption is that errors will be made by them, invariably to my disadvantage, due to carelessness. I have therefore instituted various safeguards to protect myself.  

I will give just a few personal examples to highlight the problem. I noticed last April that the IRS had debited my mother's checking account shortly after April 15th. I knew that she had already received a tax refund. In effect, she had paid another person's tax obligation, probably due to a coding error at the bank or the IRS.

Several years ago, I noticed that over five thousand had been transferred out of my brokerage account to an account that did not belong to me. I called to complain and the firm then gave me my money back. Then, when I looked at the account the next day, the money had been transferred back out of my account to the same unknown account. I complained again. The money was put back into my account. Then, the same thing happened again before I become more insistent that I did not appreciate Ameritrade giving my money away. Apparently, a husband was attempting to transfer money from his account to his wife's account, and someone made a an error in entering his correct account information. Instead, my account number was entered as the source of funds for the transfer. I did not receive an apology for the inconvenience and was just told that mistakes happen. This highlights the importance of checking every line item in your statements. 

Another example happened when I went online to check the activity on my credit card. I was not able to log into the account, and called the company.  I found out that I had changed the passwords recently, and my address, to what appeared at Google Maps to be a vacant lot in Wisconsin.  And, I had just use my credit card to buy $500 or so in goods at Wal-Mart store in Wisconsin. I still had my card, but the criminal had both my card number and social security number. Along with the security number on the back of the card, that information was sufficient to access my account online, change my password, and my address. Since the criminal did not have the card, the order was placed online at Wal-Mart for pick-up at the store.

You would think that WMT would have a security requirement that the customer show the card, but apparently that is or was not the case. Or if it was, then the procedure was not followed by the WMT employee. Simple safeguards could stop a lot of fraud. I would add that this occurred on the first day of my 30 day cycle and my credit limit was then $30,000. I caught it in quickly, possibly in time for the credit card company to even catch the criminal, but nothing was ever done other than cause me to jump through a number of hoops and spend several hours of my time cleaning up the matter.    

Based on my experience in dealing with the card company, I could see that it could be a lot more problematic for me if I had not been so diligent. If more than $500 was involved, say an exhaustion of my credit limit over 30 days, then the card company would likely have been even far more difficult. And, I had difficulty under the circumstances described above, for a relatively small sum, and I had paid my bill on time and in full every month since taking out the card in 1976. So my reaction was to reduce the credit limit to $3000 and to start using a debt card more, which is linked to an account and always funded with a small amount of money, keeping that account funded with a main checking account and monitoring both of them closely (twice a week).  

A few months before this theft, I have given my card to a hospital employee to pay the deductible for a stress test ordered by my Doctor. That person had my social security number. I thought that it was odd at the time that she looked on the back of the card. Since that time, I have never used a credit card to pay for a deductible expense since all the billing people working at dentist and doctor's offices, as well as medical facilities, have access to my social security number. The LB notices everything. 

On the same day that I detected the fraud on the credit card, I received that day, or no later than the next day, an email notice from a service about the address change. That service is one that I had then, and still do, that will give me 24 hours notice of a significant change in my credit history, such as an address change or a new account. That service costs me $4.99 per month.

My mother who is 88 had her account debited last April by the I.R.S. to pay someone else's tax bill. And over the weekend, she received a bill for her medicare deductible (from the same hospital billing mentioned above) that I had already paid in May. Many elderly people would have paid that bill twice. 

In other words, I am extremely vigilant and careful, and that is in itself not enough these days given the widespread criminal activity and the lackadaisical investigation activities of both the card companies and law enforcement in this area, lack of diligence by financial institutions to prevent unauthorized access to financial information, and the negligence of those institutions processing information.  Hyper vigilance will simply cut down on the frequency of becoming a victim of a criminal or a financial institution's negligence.   

1. The VIX Signal: The general consensus remains that the U.S. economy has hit a soft patch, and the current correction will be a  mild one. This article summarizes that consensus. In that article, the author argued that the ^VIX supported those who believed in the temporary soft patch and the mild stock downturn. The VIX is still below 20, which does show a lack of nervousness about the negative events piling up and causing a more serious correction.

The one year VIX Index Chart does show an overall quieting of volatility, a pattern in effect since the huge spike in volatility occurring in late September 2008. I have referred to that spike as the catastrophic phase of the Unstable VIX pattern or sometimes the Phase 2 of the Unstable Vix Pattern. ^VIX Historical Prices The get out of Dodge moment occurred on September 29, 2008, when there was a spike from 34.74 to 46.72. That spike, which was confirmed with another one on 10/2/08, was inconsistent with a continuation of the Phase 1 Unstable VIX Pattern and signaled the start of the catastrophic phase of the long term secular bear market as well as a new cyclical phase on the ongoing cyclical bear market. The peak closing number of 80.86 was hit on 11/20/08, and thereafter the VIX started to stabilize and to gradually move down, viewed as a positive factor. ^VIX Historical Prices It was not until mid-May 2009, however, that the VIX moved consistently into the high end numbers for the Phase 1 Unstable VIX Pattern, which would be in the mid-30s.

By August 2009, it was clear that the Phase 1 Unstable VIX Pattern had taken over from the Phase 2 Pattern.  In the Phase 1 Pattern, there will be whipsaw action in the VIX, mostly in the 20 to 30 range, with temporary periods of movement below 20 and above 30. Vix Asset Allocation Model Explained Simply As I have discussed many times, hedges are placed into effect after the unstable pattern meanders below 20, and are then taken off when the VIX shoots back toward 30. I would possibly eliminate the hedges with a spike into the high 20s. The market would most likely be move down significantly in price at that time, and the hedges would be performing their function by going up in price. 

This pattern of adding to and removing hedges would remain in effect until the Unstable Vix Pattern gives way to the Stable VIX Pattern. Historically, the VIX has signaled the start of a Stable VIX Pattern by moving below 20 for at least 3 months. Once that movement has occurred, then the market has in the past started a sustainable rise in price that lasts for several years. Prior green light signals were given in 1991 and 2003, terminating in October 1997 and August 2007 with Trigger Events, another get of Dodge signal. Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2 VIX and S & P Compared 1990 to 1997 Multiple Confirmations of VIX Model-Canary in a Coal Mine VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

It is creating much dispute among staff whether historical signals are apropos now. LB says that the VIX is signaling that the main problems may soon be resolved (housing price stabilization, commodity prices coming down, European sovereign debt problems, a long term reduction in U.S. government spending in the current discussions involving the raising of the debt ceiling). RB is inclined to agree with the LB, but will never admit to it. The OG says things are getting worse not better, and there are a number of possible, even probable scenarios, that could send the stock markets around the world into another major cyclical bear market.  

The OG believes that one more significant cyclical bear cycle is in the offing, and that short term down move will take the S & P 500 to below 1000 by 2013. So, the OG is not placing much if any reliance on LB's VIX Asset Allocation Model, which will require that all hedges be removed on or before 6/22/11, assuming the Nerd's model confirms the formation of the Stable Vix Pattern. The OG wants to keep the stock allocation modest through 2012, and to maintain the hedges until there is a spike in the VIX above 30, irrespective of when that occurs. The OG is filled with anxiety about what may soon happen. 

LB wants to remove the hedges which it bought recently as Head Trader here at HQ, assuming a successful test of S & P 500 at 1250, and then increase the stock allocation by at least $50,000 shortly thereafter. In the event the VIX then spikes in a manner inconsistent with the Stable VIX Pattern, creating yet another Trigger Event in its Model, then those positions could be jettisoned, probably at a loss, but that loss would be more than offset by gains already realized by the LB so far in 2011. 

The dispute has been kicked upstairs for resolution by Headknocker who seems to favor the LB in these disputes among staff here at HQ.  

If the VIX bursts out of its movement below 20 and spikes into the 20s, remaining elevated for several days, then the dispute will be resolved in favor of the OG, Headknocker concluded.But, that movement must at least start to occur on or before June 22nd, as our Great Leader sided with the Nerd's Model.

Continuous movement for at least 3 months below 20 has signaled the start of investable bull market lasting for several years, historically, but this time may be different. LB acknowledged that this time may be different, and has just noted that it would reverse course in the event there was a Trigger Event after the formation of a Stable VIX Pattern, no matter when that Event happens.

LB did note, with some trepidation, that the OG was unusually cogent at the staff meeting today, a somewhat disconcerting development. Possibly, being immersed head first for the past several weeks in a vat of phosphatidylserine has improved the OG's mental processes, and LB now regrets suggesting that rehabilitation technique to HK.  LB is concerned that the OG is becoming more powerful at HQ by the day. Maybe the LB needs to coddle the RB for a few days to prevent an unholy alliance from forming between the RB and the OG.  

2. The Bond Market's Illiquidity for a Small Investor: In the previous post, I discussed briefly one of the risks currently associated with buying bonds traded in the bond market. Is this Bond Safe?  

Many investment grade bonds are fairly liquid provided the investor trades in lots of 5 or 10 bonds. In 2007, when making a transition out of stocks into short term bonds, I bought several short term investment grade bonds in five bond lots.  Most were "A" rated or higher, and I used a ladder approach with the longest maturity being 2012.  Those bonds were bought from Fidelity in what is known as the Corporate Notes Program, where the investor buys the bond at par value from the issuer. So, those trades were not conducted in the bond market. 

When I made the decision to sell those bonds, and buy back stocks in February 2009, I chronicled in this blog the selling of many of those bonds, but it was a laborious process. I have to wait for a buyer willing to buy five investment grade bonds and at a fair price. It was not easy. 

Throughout that period, I was buying and selling exchange traded bonds in odd and round lots with no problems, except for a couple of execution issues previously discussed in earlier posts. 

Now, many of those bonds have been called and are disappearing from my accounts almost on a weekly basis. The yields for investment grade bonds, even with long maturities, are not attractive, unless you are okay for example to lend PEP money for 30 years at 5%.  

So, I have deployed some funds to buying junk bonds in the bond market, and that is one difficult and time consuming process. 

Most of the time, with a few exceptions, bonds are not available for purchase or sell in small lots, defined by me as less than 5. When one becomes available, I can only fill the order by entering a bid at the ask price.  In fact, I am as a practical matter not even allowed to enter an order except at the ask price.  

As an example, and just for illustration purposes, I attempted to sell 1 Appleton Papers bond at 103, when the bid was 101.1 and the ask was at 104.4.  Maybe, some small investor would like that price of 103 rather than the 104.4 price. In the stock market, I could enter a limit order like that with no problem. I knew when I hit the "submit" button that the order would not even be allowed and I would receive the following message:

Okay, so no go on 103. I can not price the bond below an existing seller. Now if I reduced my price to 102, then may the order would be allowed, but only if it was not more than 2.5% below the Ask Price:

Even if I was eventually able to find a price allowable by the broker, then the order would be submitted on a "Fill or Kill" basis, not my choice, and would remain open for less than a minute before canceled by the broker.  During that brief period, invariably less than 60 seconds, I have yet to see my order even displayed as an option for another investor. 

This is the one that is really hard to explain. I recently bought a senior May Department store bond that had a better yield than the TC DKQ which I owned at the time, so I sold DKQ again and instead bought this 1 May Department store bond. Bought 1 Macy's Bond Maturing in 2030 @ 99.5 (January 2011 Post). The third party price now for that bond is 120. And on Friday, there were no bids being displayed but someone had 39 available at 120 with a 1 bond minimum purchase. So I could have bought 1 at 120 which I did not want to do.  I wanted to sell 1 at 120, so I entered that order. This is the message received shortly thereafter: 

So, I was not allowed to even add 1 bond to that 39 bond ask bid because my "sell price" was equal to that ask price.  I will not bore the reader with all of the trade messages available. There are more of course. 

In effect, the only way to sell a bond in small lots is to wait for a bid allowing for a small lot purchase and then hit that bid precisely. It is simply not fair or even slightly reasonable to the small investor. 

I would add that at least this broker permits me to buy and sell junk bonds online. Other brokers do not afford an investor this opportunity. Yet they would allow the investor to borrow money to buy the riskiest stocks known to man. And, as mentioned earlier, while Vanguard allows the purchase of junk bonds, the commission is outrageous at $50 and I am not able to sell what I buy online. In other words, the bond market is not friendly to small investors and brokers are less so.  

At a minimum, I should be allowed to place a limit bid or ask price and to keep that order open for the entire trading day. I should be allowed, for example, to enter an order to sell 1 or 2 bonds at a limit price, irrespective of where other orders are in relation to mine, and then keep the order in force for the entire day. 

I suspect the only way to make the bond market fair for the small investor is for the SEC to force rule changes in trading. Since I do not view the SEC as having much, if any, interest in protecting small investors, I doubt that the bond market will become a hospitable place for small investors anytime soon.   
No trades were made on Friday. Stocks & Politics: LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash 

1 comment:

  1. I had to come down to the ask on selling Alon bonds, to $105, that's just the way it is on 1 or 2 bonds.
    I follow this floor trader, Riley, his videos are on youtube also, he said for 2 years the big money program traders were using small sell programs followed by big buy programs (luring shorts to be put on, then burning them). He says it's all reversed now, they are luring in dip buyers to liquidate. See how Dow is manipulated easily up 50 pts, buy Nas, Russell barely up, that's a ruse, so they can sell. My .02, I've liquidated $25K in positions on the open last few days, on the spikes.