Monday, May 20, 2013

Vix Asset Allocation Model/MBC-Maximum Level Violation/AGY Holding/Sold: 100 GDV at $20 and 155+ RNST at $23.9/New Teaching Strategy for the Young Investor: Bought Two Commission Free ETFs: VEU and EFAV/Sold 50 NLYPRD at $26.01

Big Picture Synopsis

Stable Vix Pattern
Short Term: Slightly Bearish (expecting and hoping for an immediate 10+% correction)
Intermediate and Long Term: Bullish

As a studious and experienced adherent to what I call the Turtle School of Investing, I have mostly pulled my head back into my shell and will simply wait for better opportunities to forage in stock land. In short, I am not doing much of anything now, so I decided to launch a new strategy described below to keep the OG entertained during what may be a long period of slow mo. I have raised my cash allocation some. (a corollary, aptly named the Squirrel School of Investing, calls for placing dollar bills in many locations for the winter, but that can lead to problems when the squirrel starts forgetting their location)

The S & P 500 is up 146.4% from its March 9, 2009 low to last Friday's close. As shown in the third chart at this website, Current Market Snapshot, there have been three corrections in this four year bull run of -15.99%, -19.38% and -9.94%. One is overdue now. I would not view it as helpful for the S & P 500 to continue climbing past 1700 without at least a 10% correction and a consolidation period.

5/17/2013 Close 1,667.47 +17.00 (+1.03%)
3/9/2009 Close at 676.53


The VIX closed last Friday at 12.45. With brief spikes above 15, the VIX has been moving below 15 since the start of 2013. Movement below 15 is conducive to market rallies and is labeled a Phase 2 Stable Vix Pattern, the most bullish pattern, in my Vix Asset Allocation Model.

The Vix Asset Allocation Model flashed a green light signal in September 2012. Stable Vix Pattern as of 9/26/12 When I wrote that post, I did not sound too enthusiastic about a green light from my model, sounding cautious as usual. LB just said that the Old Geezer was an Old Geezer when he was 16. 

I had a discussion with a reader who came to the correct conclusion that the VIX Model is a better sell signal than a buy signal. The buy signals have worked historically, but would not catch part of the bullish cyclical move. I gave him the following explanation which I will just quote here:

"The Vix model is a better sell indicator than a buy indicator due to the lag period built into formation of a Stable Vix Period. The 3 month lag was established, as soon as I developed the model, in an effort to avoid a false signal. 

An innate characteristic of the Unstable Vix Pattern is a temporary movement below 20, as the market rallies, but that is actually a signal to lighten up and to establish hedges for as long as the Unstable Pattern remains in effect. By emphasizing the need to avoid a false signal, there will be a period when the VIX is giving a red signal even thought the market is rising and the model will ultimately give a green signal. This could be a prolonged period when the VIX moves into hyper drive during the catastrophic phase of a long term bear market. It takes about a year or so for the Vix to settle down after one of those events, and the best analogy would be the VIX movement after the 1987 October crash. 

There are volatility indicators for other U.S. indexes. They all confirmed the trigger event signal in August 2007. The DJIA volatility (VXD) is the least volatile, and one of the most volatile is the one for the Russell 2000 (RVX)

The trigger event is not formed by movement into the low 20s during a Stable Vix Pattern phase, but that is troubling when and if the movement is continuous. If the VIX went from steady movement below 15 with occasional spurts to the 15-20 range before settling down again, and then spiked to over 20, moving for a long period between 20-25, I would make a concentrated effort to determine the reasons and the likely implications for my asset allocation and then take some defensive action if necessary based on that analysis. 

The Unstable Vix Pattern formation generally requires movement into the high 20s, or higher, for several days, whether than a one day burst caused by some news event and then a spike back down, but even that kind of movement is an Alert, something needs my constant attention. 

Many younger investors started to invest in what I call the beginning of a long term secular bear market, which I start in October 1997 for a variety of esoteric reasons.  During a long term secular bear market, I would expect the S & P 500 returns to be slightly over a 1% annualized decline adjusted for inflation and with dividends reinvested while the long term bull moves will generate more than 14% annualized. 

So, there is a premium attached to at least try and figure out which one you are presently attempting to navigate. That is one other issue besides the VIX model which is a shorter term cyclical signal. This is very hard to do and subject to a lot of judgment based on an analysis of a large data amount of data.

Initially I believed the move off the March 2009 was similar to the move off the catastrophic phase (1974) of the 1966 to 1982 bear market. Snapback rallies happen in response to those phases. By late 2011, I started to gradually change my opinion based on data series viewed as relevant to the formation of a long term secular bull market. I now believe that the weight of evidence supports the formation of a long term bull market in March 2009. The reasons are discussed throughout my comments on this topic at SA and involve such data series as the DSR and FOR ratios, the improvement in home prices, etc. 

Another issue is valuation. The market will generally periodically hit absurd valuations using traditional value criteria like P/E ratios. This will happen during the blow out phase of a long term bull market (e.g. 1929 or 1999), which is an indicator to sell into that move irrespective of any other indicator. The Vix model was signaling sell into the 1999 move which would be confirmed by using traditional, time tested valuation techniques. 


Short Term: Neutral  
Intermediate Term: Bearish
Long Term: Extremely Bearish

Although the Merrill Lynch High Yield Master Index has now fallen to below 5%,, JPM strategists believe there is more upside this year after a YTD return of 6%. Those strategists believe that a 10% return is possible in 2013 based on their view that the U.S. economy will remain stagnant. and the "rise in treasury yields will be remain measured" I will give my two cents on that forecast.

Wrong on all counts. Maybe that is too strong. Time to back the truck some and try it again. We are after all talking about predicting the future, where making a lot of guesses improves the odds of being right on one of them. JPM's strategists are wrong on three out of three of their guesses, or two out of three guesses or maybe one out of three or maybe not, one of those or maybe none of them.

The U.S. 10 year will not wait for the FED to announce the cessation of QE that has driven yields across bond land, including junk bonds, to abnormal levels. Treasury yields will start rising this year based on the realization by more and more bond investor that the loss from holding low yielding 10 year paper is not worth the payment of a negative real yield. By this time next year, based on a more robust U.S. economy than currently forecasted, the ten year will be around 3.5% and will take the entire bond market down with it. The process toward rate normalization may take another two years as the FED continues ZIRP into 2015, thereby providing an anchor in the yield curve for everything from the 3 month treasury bill to the 5 year note. A market based 10 year treasury yield, rather than one determined by the FED's massive intervention, would be about 4.5% to 5% now based on the inflation forecast embodied in the 10 year TIP pricing.

A 5% 10 year treasury is close to a normal rate and has historically been a benign one for stocks (e.g. 1991-2000):

10-Year Treasury Constant Maturity Rate- St. Louis Fed

MBC Will Pay a 3% Annual Coupon

What can I say other than "Fudge". Maybe that is not strong enough so "Pooh on That".

It was down to the wire.  MBC Down to the WireStatus of Citigroup Funding PPNs: MOU, MBC, MKN, MKZ

With just three trading days left in the current coupon period, the Russell 2000 closed above the maximum permissible level of 994.03 last Friday. It only takes one close about the maximum level to cause this security to pay its minimum 3% annual coupon rather than one based on the percentage gain in the Russell 2000 since March 21, 2012. I was going to receive for my 200 shares an annual coupon payment of either $60 or close to $600. The Russell 2000 just had to remain below 994.02 last Friday, today and tomorrow. Sa La Vie. It is what it is.

Closing Value on Friday May 17, 2013 996.28 +10.94 MAXIMUM LEVEL VIOLATION
End Date May 21, 2013.

Since I will be receiving a 3% annual payment on a $10 par value investment grade senior unsecured bond on 5/29/12,  with the position purchased below par value, I can not complain. Bought 100 MBC at $9.84Bought 100 MBC at $9.78

I had a chance to make more and 3% for what amounts to a 1 year investment grade bond now looks a lot better than .14% on a 1 year treasury. Standard Chart - For readers with bad eyesight, there is a period before the "1" in that yield number for the 1 year T Bill.

At least I am earning a real rate of return on this note, and have had a decent chance to earn a lot more.

The last MBC annual coupon period starts on May 21, 2013. The starting value for the last period will be closing value of the Russell 2000 on that day.

The note matures on June 9, 2014. I will receive a principal payment of $2,000 for my 200 shares at that time, assuming Citigroup is still solvent, otherwise I am screwed. I will make a small profit on the bond on the redemption date.

MBC Prospectus: Final Pricing Supplement

Another PPN that I own, MOU, is also linked to the Russell 2000 and has a 3% minimum. It hit pay dirt in its period ending in February 2011 with a 27.93% annual coupon on its $10 par value and then 3.7% in 2012. (snapshots at MBC & MOU and Item # 3 MOU) My position in that one was bought at slightly above par value. Bought 100 MOU at $10.12 (April 2009) The last period for MOU ended with a 10.48% coupon.  MOU Ends Annual Period with 10.48% Coupon

2013 MOU Annual Interest Payment 100 Shares=$104.83
Three years=$420.23 on $1,000 in principal par value

MOU is in its last annual period and can pay up to 37% based on a starting value of 916.16 in the Russell 2000 with a Maximum Level Violation Number at 1224.14. One close in the Russell 2000 on or before the end date will cause this security to pay its 3% minimum. The end or closing date is 2/22/13. This unsecured senior note matures at its $10 par value on 3/10/2014. All of my Citigroup Funding PPNs mature next year. I will miss them.

Friday's Closing Price: MBC: $10.94 -0.65 (-5.61%)

U.S. Super Cycle in Energy:

One of the many super cycles supporting the U.S. economy and stocks, in a manner consistent with a long term secular bull market, is the movement toward energy independence and the production of abundant and relatively low cost natural gas.

The IEA reported that North American energy production, primarily from Canada's oil sands and U.S. shale, will grow by approximately 4 million barrels per day between 2012-2018 and will constitute about 50% of global outpout. The U.S. is expected to exceed Saudi production by 2020.

This shift will have a profound impact on the competitiveness of American industry and will lead to more manufacturing jobs in the U.S. Some firms will even start to move production back to the U.S. due to lower natural gas costs.

Stocks, Bonds & Politics: Introduction Section-Relevance of Energy Boom to Manufacturing Jobs

See Also: CNBC Report on Impact to Manufacturing

Barrons Cover Story on Subject


The European statistical agency reported that the 17 nation eurozone economy declined .02% in the 2013 first quarter, compared to the previous quarter, and -1% compared to the 2012 first quarter.  eurostat.PDF Germany eked out a .1% gain.

I would not count on Europe pulling out of its slump anytime soon in response to the recent ECB rate cut to .5% from .75%. I seriously doubt that this kind of action will have any impact.

Cisco (own)

Cisco's reported third quarter adjusted E.P.S. was 51 cents per share, beating the 48 cent expectation. Revenues topped estimates with a 5% rise to $12.2B from $11.58B. Gross margin was 63%. Cisco estimates .50 to .52 in the current quarter versus expectations of 51 cents.

During the third fiscal quarter, Cisco generated $3.1B in cash flow from operations; repurchased approximately 41M shares at an average cost of  $20.85 and paid out $905M in dividends. I am using the dividend to buy more shares.

Market Reaction: CSCO: 23.89 +2.68 (+12.62%)

FRIDAY'S CLOSING PRICE: CSCO: 24.24 +0.35 (+1.48%)

The BLS reported that April CPI declined .04% on a seasonally adjusted basis. The core index increased by .1%. For the 12 months ending in April 2013, the non-seasonally adjusted CPI increased 1.1%.  Consumer Price Index Summary

Real average hourly earnings increased by .5% in April.‎ ftportfolios/ cpi. PDF

The Cleveland FED has come up with an alternative measure of inflation called median CPI.

A representative from the Cleveland Fed explains the importance of median CPI as a forecast for future inflation trends in this YouTube, capable of being understood by our RB and an average first grader.

A more wonky explanation can be found in this Cleveland Fed paper; Forecasting Inflation? Target the Middle

The median CPI for April was not a negative number but a positive .2%. Current Median CPI :: Federal Reserve Bank of Cleveland

This table was interesting to me since it is the first time that I have seen anything like it. Median CPI detail table

Recent Dividend Reinvestments:

My SAN position is in the red, although I have booked good profits in the SANPRB shares and have an unrealized gan in the preferred shares that offset my unrealized loss in the common shares. I am attempting to average down opportunistically with small lot purchases, and I am reinvesting the still very generous dividend. I view SAN shares to be a long term hold. It may take a few years but the current price should look good in retrospect hopefully within 3 to 5 years.

SAN Dividend Reinvestment Average Cost Per Share=$6.84
By reinvesting the dividend to buy additional shares, I have so far at least avoided Spain's withholding tax.

IGD is one of my closed end funds that pays monthly dividends and is part of my CEF global stock allocation. ING Global Equity Dividend & Premium Opportunity Fund The ex dividend date is the first business day each month. I have owned this one for awhile and have not been satisfied with its performance. Instead of jettisoning the position, I am more likely to change my dividend option to payment in cash and then redeploy elsewhere. Another reason for that change would be the relatively narrow discount to net asset value. The discount was -5.85% on 5/14/13.

Sponsor's Site: ING Global Equity Dividend and Premium Opportunity Fund - Overview

Average Cost Per Share $9.42
JZV and JZJ Semi-Annual Interest Payments:

The interest payments from Trust Certificates have gone way down from their heyday due primarily to redemptions from owners of the call warrants. Stocks, Bonds & Politics: Trust Certificates: New Gateway Post It was fun while it lasted, something like shooting fish in a barrel.

JZV and JZJ made their semi-annual payments on 5/15/13.

TCs trade flat which simply means that the price is adjusted by the amount of the interest payment on the ex interest date, just like a stock, and the buyer does not pay accrued interest to the seller. Exchange traded bonds, unlike those traded in the bond market, trade flat.

JZV and JZJ are vulnerable to calls now at their $25 par values plus accrued interest. In fact, JZJ was partially called in 2010. The functionally equivalent JZE was fully called by the call warrant owner. Incidentally, I had the lowest purchase price ever on JZE at $12.5, caught on a very bad day for stocks with a GTC limit order.

2010 JZE 100 Shares +$1,242/82 Shares Partial Call JZJ +$567.44
I still have JZV shares purchased at below $10. (Buy of 50 JZV at 9.93 March 2009Item # 4 Snapshot) Based on the $25 par value and the 7% coupon, the current yield at a total cost of $9.93 is 17.62% and the underlying bond owned by the trust is investment grade. FINRA - Investor Information -CNA Senior Bond Maturing 11/15/23.

I played the volatility on that one successfully during the Near Depression period until I bought the shares at $9.93 and then subsequently added some on the way back up:

JZV as of 3/15/13: 150 Shares Average Cost Per Share $19.1 Unrealized Gain $960.6 

KTN is the only TC currently owned that has no call warrant attached to it, and I am just keeping my 100 shares bought at less than $14, with 50 of those shares currently held in the ROTH IRA. I did take some profits on that one earlier and will just keep what is left.

KTN 50 Shares as of 5/15/13 Average Cost Per Share $14.16
Current Yield at $14.16 total cost is 14.49%. The underlying bond is investment grade.

The other 50 KTN shares remaining have a total average cost of $13.26:

I was successful trading the TC Merrill Lynch Depositor Inc. PreferredPLUS 7.55% Trust Cert. Series FAR-1 for First American Corp. (PJS), which can still be bought. PJS is a $25 par value security. My lowest purchase was at $7.2. Bought PJS at $7.2-October 2008Bought 50 PJS at 17.95 August 2009Bought 50 PJS at $17.8 in Roth August 2009Sold 50 of 300 PJS January 2010Sold ALL PJS at 24.75 & 24.65 April 2010Bought 50 PJS at 23.73 June 2010Added: PJS at 24.72 October 2010Sold 100 PJS @ 25.2 May 2011Sold Remaining PJS at 25.15-Roth IRA September 2011 (Snapshots at the end of Stocks, Bonds & Politics: Trust Certificates: New Gateway Post)

The TC PJS has the same coupon as the underlying bonds and both will mature at the same time. The underlying bond is now a CoreLogic (CLGX) obligation.

I sold out of that PJS position and instead bought 2 of the underlying CoreLogic 2028 bonds in the bond market, simply because they presented a much higher yield than PJS. The bonds almost never trade and are very hard to buy. FINRA - Investor Information - Market Data - Bonds - Bond Detail I do a lot of what I call functionally equivalent trading. PJS represents a beneficial interest in the bond that I bought directly. Bought 1 7.55% CoreLogic Senior Bond Maturing 4/1/2028 @ 94.975 (April 2011);  Bought 1 CoreLogic 7.55% Senior Bond Maturing 4/1/2028 at 84.95 (February 2012).

The cost numbers include the commission:

The original issuer was First American but the bond is now a CoreLogic obligation. The bond symbol has been changed to reflect that fact. The bond is listed at page 66 of CLGX's last SEC filed Annual Report: CLGX-12.31.2012-10K

Last Friday's Closing Prices;
JZV: 25.56 +0.12 (+0.47%)
JZJ: 25.70 -0.04 (-0.16%)
KTN: 31.12 -0.62 (-1.95%)
PJS: 25.84 +0.03 (+0.12%)


I noticed last Thursday that Fidelity took back a semi-annual interest payment made by AGY Holdings on May 15, 2013.  I had expected AGY to default and had assigned a 10+ risk rating to that bond. Item # 4 Earnings: AGY Holdings November 2011.

This bond is a second lien bond maturing on 11/15/2014, with a 11% Coupon. FINRA Giving a second lien bond my highest risk simply highlights my  evaluation of the AGY's value as being far less than principal amount owed on that bond.

Earnings have been pathetic since I purchased one bond back in May 2011.

At least I received several interest payments.

AGY and its major bondholders holding 92% of that bond have entered into a support and restructuring agreement. I  took a snapshot of a partial summary of it:

Form 8-K It is at least a comprehensible offer within our LB's ability to evaluate.

S & P did reduce its credit rating to a "D" which means default, which is an appropriate description when a company fails to make an interest payment.

My first reaction, which may be incorrect, is that I can not participate in this offer for two reasons.

First, I would be exchanging a registered bond for another one that is not registered with the SEC. While I am certainly no expert, I question whether an individual in my position can receive a Rule 144 bond. If I can receive one in this kind of exchange, I could not sell it unless several conditions are met.  Rule 144: Selling Restricted and Control Securities As a practical matter, I would have to hold the unregistered security until I could either exchange it for a registered one (which may never happen) or wait for a redemption at maturity.

Another problem is that the owners of the 2014 bond would receive an aggregate principal amount of the new 2016 unregistered bonds equal only to 50% of the aggregate principal amount of the 2014 bonds. I own 1 bond and there is no such thing as a 1/2 bond. I gave up on this one a long time ago anyway and will probably do nothing even if could accept the offer. The only 50% of the 2014 bond's principal amount would be exchanged for newly issued convertible preferred shares in KAGY Holdings, the parent company of AGY Holding.

Lastly, I would have no interest whatsoever in receiving a convertible preferred interest in the private company owning AGY.

The plan is also described in this article and this SEC Filed Press Release.

The restructuring agreement can be found at the SEC.

For this restructuring to work, 97% of the bondholders would have to accept the terms and tender their new bonds for what is offered in the preceding snapshot. If that happens, there will still be some 2014 bonds outstanding, probably including my 1 bond, but substantially all covenants and collateral provisions and "certain events of default" would be eliminated from the 2014 bond's prospectus. I would at a minimum lose my collateral position if the exchange goes forward and would most likely be wiped out completely in a BK filing before the maturity date in 2014.


Before discussing the first trade, I wish to emphasize that I came of age as an investor in a long term secular bear market for stocks and bonds that lasted from 1966-1982. The underlying cause for those bear markets was accelerating and clearly problematic rates of inflation. This period is seared into every one of my brain cells:

Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis

1. Sold 50 NLYPRD at $26.01 Roth IRA (see Disclaimer): As stated numerous times over the past several years, I view the disadvantages of equity preferred stocks to outweigh their advantages. Many of the disadvantages are discussed in these posts:  Advantages and Disadvantages of Equity Preferred Floating Rate SecuritiesREIT Cumulative Preferred Links in One Post /Advantages & DisadvantagesEmbracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock. I also discussed my opinions in a SA article that was comparing an equity preferred stock and the common stock from the same issuer. Seeking Alpha

The preferred stock of a REIT has none of the positive characteristics of common stock, including an ownership stake in the business and the payment of qualified dividend, and has all of the negative attributes.

The fixed coupon preferred stock, like NLYPRD, has that nominal similarity with a bond but compares negatively with bonds in all other important respects. The preferred security is junior in priority to all bonds and senior only to common stock. Unlike a bond, there is no maturity. The protection against a call is limited to generally five years after issuance and then the issuer has the option to redeem or stick the preferred owners with a non-competitive yield in a rising rate environment. An appropriate description of the issuer's call option right is tails I lose and head's the issuer wins. If rates fall, the issuer will redeem and refinance at or after the call date depending on interest rates at that time. If rates rise a lot, the issuer will be happy to stick those owners with a non-competitive yield that can most likely only be sold for a loss when bought today in an abnormally low and artificial yield environment.

So, I am in a drop of the hat trading pattern for these securities. I do not need much of a profit to sell the shares, particularly when the shares were bought near par value, after collecting one or more dividend payments. 

Snapshot of Trade:

Snapshot of History:

Snapshot of Profit:

2013 ROTH IRA Sold 50 NLPRD +$41.47

Bought 50 NLYPRD at $24.9 (January 2013)

Last Friday's Closing Price: NLY-PD: 26.20 +0.05 (+0.19%) 


I am not a young investor but a seasoned one who is still learning after over 40 years. When I started to invest in the 1960s, the internet was pure science fiction, and there was no thing as a discount brokerage. ETFs had not been invented, and there were very few mutual funds. There were several closed end funds that had come into existence prior to the Great Depression and had managed to survive such as Adams Express and Tri-Continental.

I thought that it would be worthwhile to show how I might go about investing when I was 25, using the products that are now available and my overall knowledge about stock market cycles and investor behavior. Until I get tired of doing this exercise, I will limit investment to no more than $3,000 in the first year, $4,000 in the second year, and $5,000 in the third year. I could use any dollar amount but simply chose those amounts since I had at least that much available to invest back in the late 1970s. Inflation has taken its toll since 1979. I did a calculation using the calculator at the The Federal Reserve Bank of Minneapolis and found that $3,000 in 1979 is now equivalent to $9,668. Something to keep in mind. Inflation is the norm, not the exception.

The foregoing limits apply to the Young Investor with 0-5 years experience who is primarily starting to build their core portfolios.

Another set of ETFs will be selected for the young investors with 5-10 years experience who have already made significant progress on building the core portfolios, but have started to branch out some with more narrowly focused ETFs that add weightings to particular regions, industry sectors or stock selection criteria such as high dividends, dividend appreciation or low volatility.

A young  investor may want to stare at this chart for a few minutes or until the light bulb goes off:

Consumer Price Index for All Urban Consumers: All Items - St. Louis Fed

One risk is that an individual will not have enough money to enjoy their golden years or worse, run out of money. Unless you are born to great wealth or acquire it doing your life, a 1.9% ten year treasury note is not going to do the trick for you.

I discussed in a SA comment that young investors just starting out need to choose ETFs that can be purchased commission free at their brokerage firm, provided of course there is a deep enough selection.

I noticed that TD Ameritrade had over 100 such offerings including several low cost Vanguard ETFs.  Vanguard offer their customers commission free transaction on the Vanguard ETFs. I know that Schwab has over a 100 commission free ETFs.

For the young investor just starting out, the benefit of this approach is connected to the relatively small amount that the individual has to invest and the probable lack of experience and time to choose investments.

By focusing on commission free ETFs, at least for a few years, small odd lots can be purchased without skewing the average cost per share up due to the commission cost. A young investor might only have a few hundred dollars at a time to invest.

My general thinking is that the young investor needs to start out with the broadest and lowest cost ETF first, bypassing bonds altogether for now due to their unattractive yields and the 60 year time horizon favors the equity investor. A cheap bond fund can be added later after rates normalize to true market prices in smaller amounts than the stock purchases.

Another reason for choosing broad based ETFs is that they will capture market trends, up or down, and do not require as much timing as narrower selections such as sector or country ETF. Most young people have other matters requiring their attention besides stocks and bonds. So, it is important to keep it simple in the early years.

For Fidelity, the broadest U.S. stock ETF ITOT offered on a commission free basis is ITOT, which has a .07% expense ratio and 1502 holdings.
iShares Core S&P Total U.S. Stock Market ETF (ITOT)

One of my nephews, who just graduated from college and has just started to work for Accenture, picked that one to start in his Fidelity account.

My other recommendation to him was to keep his individual stock selections below 10% of his total portfolio for several years, as he acquires more expertise at performing due diligence research and acquires more experience with the investment process for selecting individual common stocks. Even before the first individual selection, the investor has to acquire basic knowledge and skills and be willing to read original source material available online at the SEC's website.

Basic knowledge would be learn about the key statistical criteria, including of course the P/E and P.E.G ratios as well as P/S, P/B and other statistics found at Yahoo Finance's Key Statistics page available for every publicly traded company. This is a link to the JNJ Key Statistics.

For a Vanguard brokerage customer, the broadest and lowest cost ETF for exposure to U.S. stocks would be VTI which has a .05% expense ratio and 3245 holdings. Vanguard  Total U.S. Stock Market ETF

For a Schwab brokerage customer, the broadest and cheapest one is the Schwab Broad Market ETF with a .04% expense ratio and 1948 holdings.

While market timing needs to be kept to a minimum, I did suggest a few general rules about timing. Most of the time, the investor would be doing nothing at all.


(1) Small odd lots need to purchased after major downdrafts and always after a catastrophic decline (e.g. 1929-1932; 1974; September 2008-March 2008). I define those declines as relatively fast declines of more than 45% that occur in every long term secular bear market.

(2) Some paring is okay during the blow off phase of a long term bull market (e.g. 1999).

(3) Buying needs to be postponed when the forward P/E of the S & P 500 is over 20 except during a recession.

(4) At least one purchase needs to be executed when the market declines 10%, and another at 15% and another at 20+% evenly divided by amounts.

(5) The ETF needs to be enrolled in the broker's dividend reinvestment plan, but I would quit buying additional shares with the dividend whenever forward P/E for the S & P 500 is over 22, except during a recession, and then make one purchase with all of the cash dividends when the S & P 500 forward P/E falls below 18, and then start the reinvestment back.

My purchases will be in small lots under this strategy.

I will occasionally pick an ETF for a young investor with 5-10 years experience, wanting to add weights to particular asset classes. The selection in Item # 3 tilts my international weighting slightly in favor of developed markets and to low volatility stocks within those markets. By this time, the young investor would have an understanding of their tolerance for risk and some knowledge about the types of investments that appeal to them and why. I will simply be picking something that I may have bought at 30-35. I have always been a cautious investor, an avid practitioner of the turtle school of investing who will beat almost all of those hares and wild and crazy guys to the finish line.

The first broad ETF selection is the core international stock selection VEU. The Fidelity commission offering would be iShares Core MSCI Total International Stock ETF (IXUS), with an expense ratio of .16% and 3405 holdings.  

2. Bought 20 VEU in Roth IRA at $48.61 (New Teaching Strategy for Young Investors: 0-5 Years Experience)(see Disclaimer)

Snapshot of Commission Free Purchase:

2013 ROTH IRA Bought 20 VEU at $48.61
I stuck this one in the Roth IRA as I slightly increase my stock exposure in a bond heavy portfolio. Most of the stock ETFs and CEFs in that account are high yielders (e.g. the CEFs: EXG, IDE, DPG, STK, GGN, IRR, JLA and the ETFs SDIV, MDIV, GYLD (balanced), HGI, REM, and the ETN MLPG).

VEU will be the lowest yielding stock fund, below GAL and TDIV.

Security Description: The Vanguard FTSE All-World ex-US ETF is a broad ETF for foreign stocks, both in developed and emerging markets.

This ETF, as noted above, certainly qualifies as inexpensive with a .04% expense ratio.

The ETF has broad exposure to foreign stocks with 3245 holdings at the present time.

Sponsors's webpage: Vanguard

MSN Money Page: VEU

VEU Page at Morningstar (rated 3 stars, refers to ETF as a solid choice for the core international stock allocation)

I took a snapshot of the top 15 country weightings: FTSE All-World ex-US ETF - Portfolio

The top holding as of 3/3113 was the Swiss firm Nestle with a 1.4%, followed by Royal Dutch Shell at 1.2% and HSBC at 1.2%.

Prior Trades: I use ETFs primarily as trading vehicles and for diversification. Sometimes I will layer a sector specific ETF over individual holdings in that sector in order to increase and broaden my exposure to a specific sector, usually for a relatively brief time. An example would be two ETFs that I have bought and sold in the financial sector (XLF and VFH), where most of my holdings are concentrated in smaller regional banks. In this regard, one sponsor provides most of what I need: Select Sector SPDRs

I will rely on ETFs, CEFs and mutual funds more heavily for international stocks where I simply do not have the same knowledge base as I do for domestic equities.

In addition to this recent purchase, I own 50 shares bought in a Vanguard taxable account. Bought 50 of the Stock ETF VEU at $44 (February 2012)

Another trade was less than optimal and is reflective of the LB's frequent frenetic trading style. Generally, the Nerd Machine is better at entry points than exit points.

BOUGHT VEU at $29.8 (4/6/09 Post)-Sold 100 of the ETF VEU at $38.6

2010 VEU 100 Shares +$862.98

Rationale: (1) This foreign ETF gives me exposure to the world's growth market in Asia and Latin America. I also gain exposure to the blue chip companies in Europe, Canada and Australia. The owner of this ETF would have had exposure to the surge in the NIKKEI 225, which has recently moved from 8661 on 11/13/12 to a 14,782 close last Tuesday. There are good reasons to have international stocks in the portfolio for purposes of diversification, but the correlation with U.S. stocks will generally be high. Ultimately, the investor will have to fine tune the portfolio with investments that have low positive and negative correlation with stocks. Vanguard has a helpful graph at page 7 of the following paper showing the monthly correlations of traditional asset classes between 1988-2011. vanguard.pdf

I will underweight foreign stock ETFs to no more than 30% of my core stock allocation. With foreign ETFs, the U.S. investor acquires another risk, simply called currency risk, that kind significantly impact overall results. The value of the international fund's portfolio will be determined by each holding's value in the host market translated back into USDs, so ideally the owner of an international stock fund would want the foreign currencies to gain strength against USD after purchasing a U.S. fund owning all type of foreign securities.

I also believe that the U.S. is the world's leader in innovative new companies, and the rest of the world often follows with "me too" firms that copy or slightly enhance whatever is invented in the U.S.

I bought the foreign core allocation first since many foreign markets have trailed the performance of U.S. stock markets which contributed to the small underperformance of VEU compared the the ETF for the S & P 400 SPY.

The SSE Composite (China) is down from a year ago. Brazil's market has also decline over the past year, IBOVESPA - Index Chart, and S.K's market is up only slightly, KOSPI Composite Index. Those markets have the potential to catch up.

Unadjusted for dividend payments, VEU had risen about 20% for the year ending on 5/14/13. Vanguard FTSE AW ex-US ETF ETF Chart The S & P 500 had risen 23.2% over the same time period.

Risks: In addition to currency risk described above, this fund would also have what is generally known as country risk, something that can be understood by generating a picture of Lenin or Hugo Chavez in your mind. There is the usual stock risks which are mitigated some by the extreme number of holdings.

Future Buys/Sells: See Outline of Trading Rules Above

Last Friday's Close: VEU: 48.76 +0.36 (+0.74%)

3.  Bought 15 Shares of EFAV at $61.6 (New Teaching Strategy for Young Investors: 5-10 Years Experience)(see Disclaimer): In this section, I am picking something that I may have bought when I was 30-35. None of these products were then available, and my discount brokerage firm was Charles Schwab who charged around $45 for trades made using a telephone keypad.

Almost back in the age when Adam & Eve walked hand in hand beside the dinosaurs. Museum Review - Creation Museum That museum is a place viewed by many Americans as the primary source for science education. I promised not say anything else about it but would again refer to this article in  Vanity Fair.

Snapshot of Purchase:

Confirmation Page Excerpt
I am just going to briefly describe this ETF since I am tired already writing this post.  It is already too long. Any disagreements out there?

Security Description: The iShares MSCI EAFE Minimum Volatility Index Fund (EFAV) owns low volatility stocks in foreign developed markets which would include Europe, Japan, Hong Kong, Singapore and Australia.  The expense ratio is low at .20% with a fee waiver of .14%. As of 5/16/2013, the fund had 173 holdings.

I took a snapshot of the top 10 holdings as of 5/16/13 which is about what I expected before looking at it:

EFAV Page at Morningstar

An alternative to this fund is the S&P International Developed Low Volatility Portfolio (IDLV) from Powershares. It has a .25% expense ratio after a .1% waiver. That fund is available no on a no commission basis at Schwab. ETFs

Rationale: Exposure to low volatility stocks in foreign markets, mostly large capitalization companies that pay dividends.

Risks: The fund has not gained any traction since my purchase as the USD gained strength against major foreign currencies. The currency risk is a potential risk and benefit, depending on the strength or weakness of the USD respectively. The U.S. Dollar Index (DXY) closed last Friday at 84.21. The close on May 8th was at 81.9. An up movement in this index is due to the USD gaining value against a basket of currencies, weighted in the EURO and includes the Japanese Yen, British Pound, Canadian Dollar, the Swiss Franc and the Swedish Krona. Dollar_Index.pdf The other risks include the usual risks associated with stocks and country risk. Even in France, where the country risk is high, it is still lower there compared to many emerging markets.

Future Buys/Sells: See Outline of Trading Rules Above

Last Friday's Closing Price: EFAV: 61.30 +0.01 (+0.02%)

4. Sold 155+ RNST at $23.9 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer): I mentioned in my last update for this basket strategy that my RNST shares may not be in the basket when the next update rolls around later this month. And it will not be. Update of Lottery Ticket and Regional Bank Basket Strategies

Part of the total return for this strategy will be realized gains, and my RNST position certainly helped in that regard.

This transaction netted a profit of $1,433.21 on the shares, brining the total realized gain for this basket strategy to $12,295.92. (snapshots of trades at the end of the Gateway Post).

Snapshot of Position Just Before Order Entry:

Snapshot of Email Confirmation of Executed Order:

Snapshot of Profit:

2013 RNST 155+ Shares +$1,433.21

As shown in this snapshot, I quit reinvesting the dividend after 4/2/12.

Bought 50 RNST at 14.14Bought: 50 RNST at 13.70Sold 50 RNST at 14.91Added 50 RNST at 15.85

RNST will now be added to the monitor list for regional bank stocks, which has close to 200 regional bank stocks in it. I will pay more attention to it than most others in that list for a potential repurchase.

LAST FRIDAY'S CLOSING PRICE: RNST: 24.31 +0.30 (+1.25%)

5. Sold 100 of 300 GDV at $20 (see Disclaimer): The Gabelli Dividend & Income Trust is a leveraged closed end stock fund that pays monthly dividends. The current monthly rate is $.09 per share. Gabelli Dividend & Income Trust Continues Monthly Distributions, Declaring Distributions of $0.09 Per Share 

At a total cost of $20, the dividend yield would be about 5.4%.

CEFConnect for GDV

GDV Page at Morningstar (currently rated 3 stars)

Sponsor's Webpage: GAMCO

Closing Data From March 17, 2013:
Closing Net Asset Value Per Share= $22.39
Closing Price= $20.14
Discount= 10%

Closing Net Asset Value Per Share on March 10, 2013= $21.97

Snapshot of Trade:

Snapshot of Position After Trade (annual purchases in August):

200 GDV as of 3/17/13 Average Cost Per Share $14.02 (unrealized gain=$1,223.83)
Added 70 GDV at $16.19 August 2012 Added to GDV at $14.54 August 2011Sold:  100 GDV @ 14.35 (not an optimal trade by any means); Bought 200 GDV at $13.33 August 2011

Total Realized Gain: Minimal at $123.61

Friday's Closing Price: GDV: 20.14 +0.11 (+0.55%)

I am becoming increasingly concerned about the market's upward trajectory with no meaningful pullback, especially given the weak numbers out of Europe and some less than stellar U.S data last week including the following:

‎New Residential Construction for April.pdf

‎Philadelphia FED Manufacturing Survey May 2013.pdf

Initial Claims for Unemployment rose 32,000

6. The Gambling Analogy for Stocks: I responded to a SA reader's comments about stock market investing being gambling with the following comment, which I will just copy here:

Beware Long-Term Damage From Stock Market Bubble Forming Now - Seeking Alpha

The market is a pure gamble when looked at daily, or any other short term time span. It is more of a gamble for an investor facing actual and potential situational risks that would cause them to sell at an inopportune time even over longer periods of time. Allowing emotions to dictate decisions can even be more important than those situational risks. 

Those situational risks include the need for money to pay for a child's college education and to pay for retirement expenses or to meet expenses after a serious illness or the loss of employment in a period like 2008 to the present where job opportunities have been far from normal. 

The situational risk might involve self-inflicted risks such as buying a home and incurring a mortgage that is simply not affordable. When the debt service payments to disposable income starts to rise appreciably above 32-33%, trouble will frequently follow. 

When looked at from a longer term perspective which would include a major secular bear market, a different view is presented assuming situational risks or emotions do not cause a serious problem. 

Between 1/1/1982 through 12/31/2012, which included several nasty cyclical bear markets and one long term secular bear market, the average annualized real return (adjusted for inflation) for the S & P 500 with dividends reinvested was 8.03%. I would regard an annualized real rate of return of 6% or higher to be excellent. 

One way to deal with the gambling issue, which exists when time is chopped into small pieces with too much focus on the here and now, is to eliminate or lessen as many situational risks as possible and take all emotion out of the process particularly both greed and fear. That would include less spending and more saving, start saving as early as possible using a 529 plan for college, and only buying suitable homes and cars.

The other way to reduce the gambling part is to avoid group think; make an effort to identify long term cycles and what causes their birth and death; always pare the stock allocation in the blow-off phase of a long term secular bull market; never go with fads trying to get rich quick in the market; maintain a balanced approach to investing using the lowest cost and broad ETFs as core holdings; rely far, far more on less volatile and value stocks than high beta and high P/E stocks; and always buy after the catastrophic phase of a long term secular bear market (1929-1932; 1974; September March 2009) 

James may be right that the market is due for significant rise. 

I would not confuse cause and effect however, if the forecast comes true. The market may sharply decline, for example, whenever the herd decides that the Federal Reserve is going to end QE and not come back with QE4, as well as when the FED starts to tighten by ending ZIRP and raising the Federal Funds rate. The first reaction would probably be to sell equities, and that would not have anything to do with liquidity. 

An investor following a balanced approach would be paring an asset class that has experienced such a robust move in just four years, irrespective of how one characterizes the cycle.

7. The Use of Reality Creations to Rationalize Investment Failures and To Make Investment Decisions:  In another comment to that same SA article, someone using the name of Snoopy44, who did not have even a glimmer of what I was saying about long term secular bull markets, opined that I was wrong for failing to account for the following facts:

"asia is plunging into chaos", "secular bulls do not not begin with commodities crashing and the entire global economy in shambles", europe is in a "major depression", "secular bulls are NOT led by staples, utilities and health care sectors", and the "chinese economy is slowing dramatically". The foregoing in just one example of reality creation in full bloom. I thought that Snoopy might be the only person in the world who had those insights but then four readers like those summaries of world events, possibly the same people would have difficulty finding China on a map. 

Well, taking into account all of those "facts", my opinions are not so enlightened as those at SA who agreed with those facts. 

What a minute? Is there a single accurate factual in that litany or is it a montage of reality creations most likely formed to justify failures? 

Eurostat just reported that the EU27 GDP for the first quarter declined .7% Y-O-Y. ‎ Is it accurate to call a .7% a "major depression".

GDP growth in China slowed from 7.9% in the 2012 4th quarter to 7.7% in the 2013 first quarter. Is that "slowing dramatically".

As to the crash in commodities, the DJ UBS index is about where it was a year ago after moving up and then down, a typical cyclical pattern. The next move could just as easily be up. The GSG index is sitting right below its 50 day SMA of 31.71 with last Friday's close at $31.62 and has been moving up since a 4/17/13 close at 30.  iShares GSCI Commodity-Indexed ETF Chart

It is just asinine to claim that the bull move since March 2009 has been led by defensive sectors.  Someone interested in forming opinions based on accurate information rather than reality creations tailored to fit pre-existing opinions would not have to look hard to rebut that claim.  Just look at how the other Select Spiders have done since March 2009.

XLY Consumer Discretionary:
March 9, 2009 Close 16.11
May 17, 2013 Close 57.55

XLE Energy
3/9/09 38.86
5/17/13 82.12

XLK Technology
3/9/09 12.4
5/17/13 32.2

XLF Financials
3/9/09 6.26
5/17/13 19.95

Sector rotation is a common phenomenon. Sure, utilities, staples and health care have led the market this year but those sectors could easily give way to Technology and Financials during the summer months and into Fall.

SPDR Select Sector Fund - Technology ETF Chart
SPDR Select Sector Fund - Finanancials ETF Chart
Select Sector SPDRs

I could go into more detail, but this is exhausting as it is.

Now, I do not know Mr. or MS Snoopy 44 so I can only make generalizations about many individual investors who make no effort to avoid error creep as much as possible. 

The kind of reality creations that I routinely observe at SA and elsewhere are the result of laziness, ideological predisposition screening out all or most relevant information, an inability to learn anything because the brain was ossified soon after birth and/or a need to rationalize failure (e.g. selling all stocks in a panic during October 2008, missing the 150% four year move thereafter, and now having money parked in a bank savings account paying nothing and losing value to inflation everyday)

Each of those categories outlined above have many subsets. Laziness would include the refusal to read any original source material before forming an opinion or even readily available basic information such as European GDP data or the returns since March 2009 of non-defensive sectors. Another characteristic of laziness is a predisposition to group think and a strong tendency toward confirmation bias.

Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS