Tuesday, July 12, 2011

Sold 100 NPM at 13.9/ING & Italian Government Bonds/Bought PAUDX/Unusual Allocation Funds/Current Forecast on When the Fed Will End its JIHAD Against the Saving Class

Michael Santoli had some positive comments about WMT's valuation in his Barrons column.  I recently added 50 shares pursuant to my Large Cap Valuation StrategyADDED 50 WMT at $52.68 (7/1/2011 Post). 

Robert Johnson of Morningstar remains optimistic about the U.S. economy, notwithstanding the weak job creation numbers. However, it is "hard" for him to see 2nd quarter GDP above 1%. He estimates that a decline in auto production will clip about 1% of GDP, whereas it contributed 1.2% of the 1.9% first quarter GDP growth. In other words, the economic news is likely to be discouraging through the summer.

When looked at in perspective, the employment gains for years prior to the Near Depression were due to the housing bubble and other manifestations of excessive debt and leverage, and consequently most of those gains were artificial and unsustainable. In a nation of over 311 million people (U.S. & World Population Clocks), there is only so much room for Masters of Disaster, paper shufflers, salesman, government employees and consultants.   

The market is currently forecasting that the FED will not raise the federal funds rate until December 2012, as noted by Randall Forsyth in his Barrons column. The OG is becoming very weary of the FED's Jihad against savers, suffering no doubt from something akin to battle fatigue, due in no small part to adjusting the strategy given the duration and severity of the pain being inflicted by the FED on savers and responsible Americans. Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans (August 2010 Post)  

This chart shows three mega bear markets adjusted for inflation. The Japanese market since December 1989, the U.S. stock market during the Great Depression, and the U.S. stock market since March 2000 are featured in this chart.  Adjusted for inflation, the U.S. stock market is down 34% since 3/24/2000 through 7/9/11.

The EURO hit a record low against the Swiss Franc yesterday. The European sovereign debt crisis still has the market on edge. GS noted yesterday that the region can not afford a full blown Italian government debt crisis.  WSJ.com

ING has €7.5 billion in exposure to Italian government bonds.  ING declined 6.1% in European trading on Monday. I have sold all my ING hybrids except for 50 shares of INZ bought at $7.82 during the Near Depression period. ING Hybrids: Links in one Post  The yield on the Italian 10 year government bond rose to the highest yield since May 2001 yesterday according to Reuters. (see also articles  in NYT and WSJ.com on the debt contagion and Italy)

The GOP would have sent the world into a Great Depression in the summer of 2008. There was an important exception, their leader George Bush, who at least recognized that the world was on the brink of another Great Depression after Lehman's failure and the federal government needed to act quickly to avert another worldwide disaster largely caused by the U.S. government and its citizens.

Fortunately, the GOP was not in control of the House of Representatives at that time as a result of the 2006 elections.  That is not the case now. United States House of Representatives elections, 2010 Zealots, particularly stupid and ignorant ones, are capable of sending the world into a dire crisis, and will not even recognize their culpability when the disaster happens.

It is just extremely irresponsible and reckless for the GOP to require consent to their demands in exchange for their approval of a debt limit extension. Many of the extremists are opposed to a debt limit extension under any circumstances, regardless of the consequences. It will be interesting to see how far the GOP will go to protect their benefactors, when the Democrats are apparently willing to cut well over 2 trillion in spending in exchange for some tax increases on the wealthy taking effect in 2013.

Boehner made it clear again yesterday that the GOP will not support any increase in taxes on their benefactors, referred to as the wealthy by Obama and "job creators" by Boehner. To the GOP, it is just irrelevant how much spending the Democrats are willing to cut. The GOP is not going to bite the hand that feeds them.  This is the same agenda that is clearly set forth in their near unanimous support of Ryan's budget proposal, where they approved decreases in tax rates for the wealthy while cutting spending that inures to the benefit of the middle class and poor.  There can be no question about their intent.  GOP Comes Out of the Closet on Medicare  The "60 Plus" Front Group and the GOP's Plan for Medicare The GOP Budget Plan and The Middle Class David Stockman and the GOP/GOP Reaffirms Commitment to Ryan's Plan for Medicare, Medicaid and Food Stamps National Council on Aging

I am now taking some measures to protect my assets in the event the crazies create an unnecessary economic crisis, at a time when investors are already on pins and needles about European sovereign debt. Possibly, if that crisis does develop, with serious worldwide economic repercussions, some members of the Tea Party crowd, who lose their jobs and then want extended unemployment benefits from the federal government, will learn something. I am joking. Ideologues are too narrow minded and rigid in their thinking to learn from history, or to form reasoned judgments based on the most reliable information, since only information conforming to their pre-existing beliefs, formed with no or minimal accurate information, is deemed relevant and reliable.

1. SOLD 100 of the Municipal Bond CEF NPM at 13.9 Last Friday (see Disclaimer): I have been paring my leveraged municipal bond CEFs after collecting several months of dividends. This one was bought last November @ 13.48.

2. Barron's Cover Story on Diversification: Barrons' cover story in this week's edition suggests six investments for diversification. The crux of the article is that stocks and bonds have higher risk levels now, due to robust price increases, and investors need to diversify. Barron's then proceeds to recommend a small cap stock fund, two bond funds, commodities, REITs and international stock funds. I would not view any of those recommendations as consistent with their thesis.  With the exception of intermediate term tax free bonds, all of those other sectors have experienced robust rallies since March 2009 and have been positively correlated to a significant degree.

This chart shows how several different asset classes have been moving in tandem, with varying degrees of positive correlation, up and down, from August 2008 to the present:

These lines include SPY (ETF for the S & P 500), the Russell 2000 Index (small cap stocks), VWO (Vanguard ETF for emerging market stocks), VEU (Vanguard International Index ETF), VNQ (Vanguard REIT ETF) and DJP (a commodity ETN).  The blue line is DJP which it is out of kilter for several months in 2008 as oil soared to 150 a barrel. Otherwise, it has been moving with the other risk asset classes. {orange=VWO emerging market; black=SPY; yellow is VEU; gold shade is Russell 2000).

One of the bond funds mentioned in the Barron's article is an intermediate tax free fund called Lord Abbett Intermediate Tax Free Fund.  While this bond sector probably has a low positive correlation with stocks and bonds, compared to the others recommended, this sector provides almost no yield at the current time.  With a rise in rates, there will also be some decline in net asset value, and municipal bond funds are also susceptible to dips caused by credit concerns.  It does not take much of a decline in price to wipe out a small dividend yield.

I do own shares in the  Vanguard  Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) and the  Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX). I do not own any mutual fund investing in long term bonds, viewing their risks to outweigh their current dividend yields. Since I view my own personal inflation rate to be greater than 4%, both of those funds are providing me with negative real rates of return before taxes.  An alternative to VFICX would be  the Vanguard Intermediate-Term Corporate Bond ETF, though it also suffers from a low current yield.

A. Bought PIMCO All Asset All Authority Class D shares (see Disclaimer): This fund is managed by Robert Arnott, who I view as a capable, informed and intelligent money manager.  This is not to say that he is infallible or even that I agree with his current allocations.  This fund is available at several brokerages on a NTF basis.  A list of those firms can be found at PAUDX Purchase Info: Investing - MSN Money.

This fund will invest in other PIMCO funds including those reserved to institutions. Arnott can go anywhere in the fund's asset allocation based on quantitative models that takes into account yields, growth prospects, and valuations of various asset classes. So, the fund could buy PIMCO funds that actually shorts stocks and bonds. Based on the last report, the fund owns PSTIX, a fund that shorts stocks. PAUDX - Fund Top 25 holdings  The goal of the fund is to achieve an absolute return of  6.5% plus inflation.

This is a link to the sponsor's web site for this fund: PIMCO All Asset All Authority Fund

This is a link to the Annual Report for the period ending in March 2011: Pimco All Asset This report includes other PIMCO funds. The fund summary for the "All Asset" fund can be found at page 6 and a list of holdings at page 48.

This fund is more likely to be negatively correlated with a typical bond/stock portfolio than the recommendations made by Barron's.  In 2008 for example, this fund had a 9.42% return. The fund did not do well in 2009, when all risk assets started to move up in tandem, and the fund lost -7.53% according to the data at MSN Money. While I would not be pleased with that kind of return in 2009, my best year ever, I at least understand the value of negative correlation (and low positive correlation) in an asset allocation plan. So I initiated a small position in this fund as a diversification move in my already extremely diversified portfolio. This is a new position for me.

The fund is rated five stars by Morningstar. Since this fund owns other funds, its expense ratio will include its costs as well as the expense ratios of other PIMCO funds.

PIMCO All Asset All Authority Class D  (PAUDX) closed down 2 cents or .18% yesterday. The closing net asset value was $10.83. The S & P 500 declined 1.81% and the Nasdaq fell 2%.

B.  Permanent Portfolio (PRPFX): This is another off beat asset allocation fund, rated five stars by Morningstar, that I already own:

179.554 SHARES of PRPFX +$2,918.41 Unrealized Gain

The expense ratio is .77% according to Morningstar.  This balanced fund maintains a relatively fixed allocation that includes a large allocation to gold and silver bullion, Swiss government bonds, natural energy and REIT common stocks, bonds and "aggressive growth".  This is a link to the last SEC filed shareholder.  Shareholder Report for Period ending 1/31/2011 (see pages 6-10). The last filed SEC Form N-Q shows the holdings as of 4/30/11: form_n-q 2011 q1

This fund is not an active allocation fund like the PIMCO All Asset fund. The Permanent Portfolio fund does have an unusual allocation, and has had the wind at its back over the past several years with its relatively fixed allocation scheme.  In 2008, it declined -8.4% and has been in positive territory in all other years from 2001 according to  MSN Money.

Given the high allocation to silver and gold, a major bear market for those two precious metals could easily cause this fund to have another losing year. I am content to hold my shares due to this funds eccentricities. I have not sold a share. I have talked about this fund periodically since 2008. (see, e.g.: Comments on Barron's Roundtable (January 2009 Post); Financial Armageddon-Avoided or Just Delayed (December 2010)

The relatively fixed allocation is around 20% gold; 5% silver; 10% Swiss Franc assets; U.S. treasuries (and some corporate bonds) 35%; real estate and natural resource stocks 15%; and aggressive growth at 15%. I would view the aggressive growth segment to be more properly characterized as uninspired and unremarkable value investing. 


  1. Someone pointed out, re: "don't tax the job-creators", that Florida has had Republican governors since 1999 and has one of lowest tax structures of any state, yet the unemployment rate is above nat'l ave @ over 10%. Businesses need customers, not more tax giveaways! The multi-conglomerates will hire overseas, not here, because they know they can pile up overseas profits and wait for another repatriation tax holiday, even use it as bribery against a US administration in an election year. 90% of the last windfall went to stock buybacks, stock grants to big shots, dividends & acquisitions, not jobs here. Bush, at the time, said no stock buybacks with the money.Never enforced, of course.

  2. I will reference a study by two economists in tomorrow's post that the abnormally low Federal funds rate cost 2.4 million jobs in 2010. While that number is an estimate, subject to debate, it is based on the common sense point that the savings class, mainly retired people, have reduced their discretionary spending due to the deprivation of any return on their savings. It is unquestionably difficult for many retired persons to live off their savings and social security, particularly when the savings earns no income and cash inflation for them is running hot.

    I heard a perceptive reporter ask a GOP politician a question. If tax cuts for the wealthy create jobs, why did Bush have the worst track record on job creation in modern American history after the BUSH tax cuts which inured primarily to the benefit of the wealthy? I would have added the period after the recent extension of those cuts. He replied that those cuts did not go deep enough, and more was needed for the job creators to create jobs. That was the justification for the RYAN budget proposal to increase the tax breaks for the wealthy. This is not what I would call learning from experience.

    Only thinking Republicans, such as David Stockman, realize that a budget compromise has to include tax increases and spending cuts. Given the fragile state of the economy, withdrawing government spending has to be over the long term, to avoid a shock effect to an economy barely limping along after massive fiscal and monetary stimulus.

  3. I wish the saving-class had representation, lobbyists, SOMEONE. I read the last census (Repubs were so against) showed 5 mil more Americans, many over 65, went into poverty. I bet more since then. Not a word of this in the media. I've tried to help my dad get some income on about $45K, it's very difficult despite what I consider good picks. Smithfield bond 7.5%, GYB, NYB, HBC-A, GOV PVR. and he was flat in June, but up modestly in a year. Entries were all good. He pays about $110 commission. I'm not putting the other $20K to work. He always relied on +/-5% interest and maybe $15K/yr total to supplement Soc Sec/pension. At least he made more than .25%. It's a crime. Tom Hoenig is are only ally.

  4. The average middle class person retires with less than $100,000 in savings. And a large percentage of them will have far less than that amount saved. A typical amount might be $20,000 to $50,000 plus no debt on their home but with some other consumer debt.

    Those savings are not producing any income for most of them and that situation is likely to continue well into 2012.

    Their savings are mostly in bank savings accounts and certificates of deposit, possibly some in money market funds. Those type of assets yield nothing of course. And social security benefits are inadequate to live on, even for the frugal.

    Even those who have ventured into bond funds are receiving a return now less than their inflation rate. Those people have already cut spending to the bone and are eating into their principal.

    The Ryan budget plan would have the greatest adverse impact on the middle class and the poor. There can be no legitimate dispute that the GOP proposal on Medicare would end up bankrupting virtually the entire middle class during their retirement years, that is, those who are now 55 years old or younger. Those people simply do not have now, and will never have, the leeway to pay health insurance premiums double what my generation will be paying.

  5. That's right. It would be a voucher for $10K/yr and Medicare will be $18K, anyone that's shopped health insurance at 60 like me, knows that.
    A big offshoot of no interest is 55yr olds aren't retiring and many taking teen entry jobs. I'm sure the banks could pay 2% on a 1yr CD. The FDIC mandates they can't raise over .75%(or .5% ?) the average rates paid in their locality unless they contest and prove something.
    So we have the Fed/Treasury telling banks NOT to foreclose and NOT to pay interest on CDs. If they borrow at .30 and buy 10yr@ 3%, 2% wouldn't kill these walking zombies but would be huge shot of juice into the economy, of course, it's all to prevent flight from stocks also.