BP/Sold 100 of the ETF VEU at 38.6/Bought 100 OSM at 15.75-Regular IRA/Bought 100 AXAHY at 14.69

While the decline in the market averages was modest yesterday, I was concerned about the failure to maintain even a modest up move. I will turn even more bearish on a short term basis when and if the S & P 500 breaches the intraday lows of 1040-1045 hit on multiple occasions in 2010 {at 1044.50 on 2/5/2010: ^GSPC; at 1040.78 on 5/25/2010, at 1042.17 on 6/82010: ^GSPC) This will break the series of higher highs and lower lows in place since March 2009, and would indicate to me at least a good possibility of a significant and sharp breakdown in the market with a waterfall loss of 5 to 10% fairly quick.

Louise Yamada made this point in a recent interview on CNBC, summarized briefly in this earlier post: Item # 4 Yamada Interview Over the intermediate or long term, it is impossible for me to prefer bonds over stocks at current prices. The main questions are how much longer will the current long term bear market last and where is it likely to bottom. Some say that there are another 5 or seven years left, and the market has not hit bottom. An adherent to this view would remain in their cash and bond allocation, and use rallies to lighten up on stocks.

The other view is that we are close to the bottom now, maybe another five to 10 percent is possible on the downside, and the duration of the secular long term bear market is more likely to be 2 or 3 more years rather than 6 or 7. A believer in that scenario would be looking for opportunities to buy stocks on weakness now, realizing that bonds could easily fail as an asset class in the coming years as governments deal with their debt problems with inflation.

1. A Depressing Column From Forsyth in Barrons: Possibly, Randall Forsyth rounded up every bearish forecast for the stock market in his "Up and Down Wall Street" column, other than David Rosenberg, Gary Shilling and his co-employee Alan Abelson. I would agree with the observations that we are currently in a long term secular bear market. I am somewhat more optimistic that most of the recent slide is over and am staying with my prediction that the S & P 500 is currently in a sideways range bound movement between 950 to 1250 for the next two or three years. And, I have been saying since September 2009 that the rally off the March 2009 lows was probably a short duration cyclical bull rally within the confines of a long term secular bear market, similar to the cyclical bull move off the catastrophic long term bear market low in October 1974. More on 1982 or 1974 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (and see Item # 2 from post dated 4/1/2010: Problems Brewing for Stocks & Item # 4 from post dated 3/29/2010 Efficient Market Hypothesis as Hokum /Historical Perspective on S & P Gain Since March 2009)

Two of the more bearish analysts mentioned in Forsyth's column are Mark Steele, BMO Capital Market's head of quantitative research and technical analysis, and Richard Russell who writes the Dow Theory's Letter. Both are recommending that investors dump stocks.

One characteristic of a fast and significant move to the downside is that every bear in the world comes out of the woodwork.

Michael Santoli discusses in this Video the factors that may lead to a breakdown below the February 2010 lows in the S & P 500, which was around 1040.

2. Sold 100 VEU at $38.6 (see Disclaimer): LB has a few billion reasons for selling this ETF yesterday. Rather than boring a reader with a discussion of all of them, I will mention just three. I purchased these shares at $29.8 in early April 2009: BOUGHT VEU AND GJT This was close to a $1000 long term capital gain. I have decided to harvest a few of these long term capital gains (LTGS) in 2010 since I know the maximum tax rate will be 15% on LTCGS. I suspect that this rate will rise, but Congress is not exactly making much progress in deciding yet what will happen after the end of this year. Dividend Tax Rate in 2011? Another reason is the LB wants to buy a limited number of foreign stocks, without having to dip into the cash allocation, and to target specific sums based on a number of considerations, including valuation, decline in the local currency against the USD, decline in the stock in local currency, etc. And, lastly, on of LB's favorite sayings is "you never go broke taking a profit".

2010 VEU 100 SHARES +$862.92

Fortunately I sold another 100 position in 2007. 

2007 VEU 100 Shares +$401.91 

3. Bought 100 AXA Financial ADR at $14.69 (AXAHY)(see Disclaimer):

Snapshot of Trade:

AXA is a large insurance company based in France. Its host market is the Paris stock exchange, where the ordinary shares trade in Euros. CS.PA: Summary for AXA The shares closed yesterday morning at €12.31. AXA ADRs use to trade on the NYSE but the company volutarily delisted them. The AXA ADR now trades on the pink sheet exchange under the symbol AXAHY. One ADR equals one ordinary share. When I placed the order yesterday morning, the ADR had fallen in price, the Euro had risen in value against the USD by around 3/4%, and the ordinary shares trading in Europe were up about 1.9%. This created a small advantage to buy the AXA ADR at a more favorable price than the one then prevailing on the Paris exchange. Some would call this arbitrage, but I am not playing with enough money to arbitrage anything. I was considering buying AXA, and I saw a brief opportunity to buy it at a slightly better price.

I have been using 11/25/2009 as the date to compare ordinary shares priced in Euros with U.S. exchange traded ADRs for European companies. This was the day the EURO peaked against the USD. AXA was then trading at €16.91. AXA Share Price Chart | CS.PA And that represented a decline from a €19.69 share price on 10/15/2009. Measured just from the €16.91 price from 11/25, the ordinary shares had declined 27.2% in local currency terms to the close yesterday of €12.31. For a security that I have some interest in buying based on the long term fundamentals, this decline interests me.

The decline in the ADR has been more severe during this same time period falling from USD 25.92 on 11/25 to $14.69, my entry point from yesterday. AXA SA ADR Share Price Chart | AXAHY.PK This is a 43.33% decline. The additional decline is due to the fall in the Euro. Of course, I still face the risk of further declines in the currency. {for anyone interested, I can loosely track these pricing issues by setting up a Yahoo Finance portfolio. I use the currency ETFs as surrogates for the exchange rate (FXF, FXE, FXC, FXA), the primary symbol for the exchange where the foreign firms shares are traded, and then the U.S. ADR price. I sometimes have to check the pink sheet price directly rather than using the YF quotes}

The price of AXA has already been crushed particularly in USD terms. If it continues to fall, I do not have a problem holding it.

I have been following AXA for a long time. This does not make me an expert of course, but it does cut down the time needed to do research before rearching a comfort level sufficient to make a small purchase. Morningstar has one of the few analyst reports available to me, and this service rates it four stars with a fair value at $33 currently. Dividends are paid annually, generally based on a 40 to 50% payout Individual Shareholders/Dividends. The dividend for 2010 has already been paid but sometimes there is a special dividend later in the year. P/B is around .6 and P/S is approximately .2. The PDF version of its annual report, which is over 500 pages, is linked at this page at the AXA web site: Annual Reports. Unless otherwise noted, all amounts are expressed in Euros in this report. AXA is shown to have have had an E.P.S. of 1.51 in 2009 on 90 billion in revenues. Shareholders equity per share was shown at 20.4 per share as of the end of 2009.

S & P also has an analyst report dated 5/19/2010. Its rating is 3 stars with a 20 USD target on the ADR shares.

S & P estimates USD earnings of $2.13 in 2010 rising to $2.36 in 2011. If that occurs, the stock is cheap based on a P/E multiple of just 6.22 on the 2011 estimate at a $14.69 price.

4. Bought 100 OSM at $15.75 (see Disclaimer): I own 200 shares of OSM in a taxable account, where I am attempting to take a long term view of this senior bond issued by SLM. When I buy it the regular IRA, I am engaged in what hopefully will be a profitable short term trade. I will take less risk in the retirement accounts, and I view this bond as too risky for the retirement accounts except as a short term trade. If the security tanks on me, I will include it in the next Roth conversion, which would be a way for me to receive a benefit from a significant fall in price.

I have discussed this security many times since the later part of 2008. It is a senior bond issued by Sallie Mae (SLM) that matures in March 2017 at $25. Interest is paid monthly based on a complex calculation tied to a 2% spread to CPI. My most recent discussion of how SLM calculates the monthly interest payment can be found in Item # 9 Bought 50 OSM at 15.74, the post dated 5/25/2010 which also contains links to some of the earlier discussions. I view the main risk of this security to be the credit risk of SLM. If SLM survives to pay off the note, then OSM would without question be a good investment at the $15.75 price.

OSM is ex interest today. The prospectus can be found at www.sec.gov.

This type of buy is analogous to trying to get on first base by leaning into a pitch, hoping that it grazes your jersey. A $50 to $100 profit on the shares and one or more monthly interest payments are the very modest objectives for this 100 share purchase.

In addition to OSM, several other bonds which are owned go ex interest today including BACPRW, GYC, CPP, PJR, and UZV.

5. BP and Whitney Tilson: I was listening to CNBC when money manager Whitney Tilson mentioned that BP was his newest long position-at 4%. CNBC The day after that interview BP sunk another 14% or so to less than $30, their lowest level since 1997, and about 1/2 of the share price on the day of the rig explosion. MarketWatch The shares took a big dive mid-day yesterday after this article in Fortune Magazine appeared, quoting Matt Simmons, that BP has a month before it declares bankruptcy. BP claims that it has enough cash to pay for the clean up.

I started hearing money managers claim BP represented good value when it crossed below $50. It is generally not advisable to try and catch a falling knife. It is conceivable that this spill could force BP into bankruptcy, but that seems to be remote based on what I know now.

I mentioned in an earlier post that I would not buy BP under any circumstances. That was the OG talking. LB is sort of an intellectual moralist, and has been known to rationalize buys of renegade type companies on one of several grounds. The most common would be that someone has to vote against the Board of Directors at the next annual meeting, and LB will volunteer HK sometimes to cast that negative vote. Besides, admittedly, refusing to buy gas at a BP station is not a boycott likely to work and ultimately may punish a small businessman who owns the station who has nothing to do with BP's renegade corporate culture, willing to sacrifice safety and virtually anything to achieve that extra dollar of profit.

ProPublica has a good article exposing how BP's culture of malfeasance leads to "accidents". Oil has been found 20 miles into the southern Louisiana marshes. msnbc.com: In Louisiana marshes, a crude awakening

I feel sorry for the individual investors who own BP, particularly the retired individuals who bought it for its perceived safety and the dividend. As for BP, what goes around, comes around.

I do not have a position in BP.

6. Risk Dispersion in Reinsurance Companies Preferred Stocks and TPs: You just never know when a series of calamaties will hit a reinsurance company. An oil rig explodes, an earthquake erupts in Chile or San Francisco, a Katrina type hurricane hits Miami, or so on. I do not invest in the common stocks of reinsurance companies.

I mentioned yesterday that I sold 50 shares of a preferred stock, RNRPRB, issued by RenaissanceRe, reducing my exposure to 50 shares of RNRPRD: Sold 50 RNRPRD at 22.05 & Bought 50 REPRB AT 20.78 In the place of RNRPRB I added 50 shares of a TP from EverestRe.

I also own two other equity preferred stocks issued by reinsurance companies. I bought 50 shares of AHLPRA, an issue from Aspen, at $19.75 and 50 shares of a fixed coupon equity preferred stock issued by OdysseyRe, ORHPRA at $25. In the case of ORHPRA, I bought that fixed coupon equity preferred stock after selling its floater, ORHPRB at 24. Just as an example of how a catastrophe can impact earnings, Aspen took a hit of 100.3 million from the earthquake in Chile. While that does not concern me in isolation, a series of hits could conceivably cause the reinsurance company to eliminate its common share dividend and even its non-cumulative equity preferred dividend in order to rebuild its capital. This may not happen but the possibility of something adverse happening along those lines keeps my exposure to their preferred stocks at very modest levels.

If I go to a 100 shares on one of them, I would tend to favor the Everest TP over the non-cumulative equity preferred stocks for several reasons. It is higher in the capital structure. It has a maturity date. The payments are cumulative and can not be deferred for more than 5 years. Interest is earned on the deferred amount at the coupon rate. So, those are advantages to the TP compared to the non-cumulative Odyssey and Aspen equity preferred stocks.

Bought 100 IFO at $9.35-Regular IRA/Sold 50 RNRPRD at 22.05 & Bought 50 REPRB AT 20.78/POM/SWISS FRANC-U.S. DOLLAR/SHORT TERM BOND ETFs

In yesterday's post I mentioned that the average driver here in the SUV Capital could drive an additional 1.3 to 1.5 miles per gallon by making some minor and sensible adjustments to their frequently bizarre driving habits. Driving One of the most bizarre is keeping the peddle to the meddle when it is obvious the vehicle is approaching a red light rather than coasting into a red light. A sub-set species of drivers will actually speed up and pass me as I coast into the red light, for the simple reason that I am not moving fast enough toward the stop.

To be conservative, I am going to postulate that 1 gallon of gas could be saved per day with modest driving changes in our peddle to meddle society for each of the 255 million registered vehicles. (DOT has 255 million passenger vehicles registered in the U.S. as of 2007, Wikipedia) At 255 million gallons per day over a 365 day year, this would translate into about 93 billion gallons of gas over the course of the year. This would save several billion barrels of oil. Those funds could be used to pay down credit cards or to otherwise improve the American consumer's balance sheet. Presto-I have made significant headway in solving two problems.

1. Bought 100 IFO at $9.35 on Tuesday in Regular IRA (See Disclaimer): IFO is a senior note from Citigroup Funding that is guaranteed by Citigroup as provided in the prospectus. This is a "sort of" principal protected note with a $10 par value, as discussed below. Of course, as with all of these securities, I am not principal protected in the event of a Citigroup bankruptcy and am subject to the same credit risk issues as any owner of unsecured and uninsured senior debt issued by Citigroup Funding.

IFO is different than the other Citigroup Funding notes discussed in earlier posts. No distributions are paid by IFO prior to its maturity on 12/3/2012 (closing date). The payment at maturity depends on the closing value of the S & P 500. The note is principal protected provided there is no close (or intraday low) before the closing date below 663.74 on the S & P 500. So, I feel good about that number. The most recent low in the S & P 500, reached near the end of the catastrophic phase of the bear market in March 2009, was 666 which has been unnerving given its connotation. (intraday on 3/6/2009 at 666.79: ^GSPC: Historical Prices for S&P 500 INDEX,RTH)

Now, if there is no close between now and 12/3/2012 below 663.74, I will receive the greater of 12% ($120 for 100 shares) or the percentage change in the S & P 500 over the starting value of 1106.24. If today was 12/3/2012, with the index closing below 1106.24, I would receive the 12% plus the $10 par value per share. The total return (profit and dividend) in that hypothetical would be about $175 on a $945 investment in about 30 or so months. So, if there is no close or intraday trade below 663.74 between now and up to and including the closing date of 12/3/2010, the note is in effect principal protected, assuming Citigroup remains solvent of course. It is not principal protected in the event of a trade below 663.74.

This one has to be studied some to get the hang of it. This is a link to the prospectus: e424b2

LB is of the opinion that IFO makes sense only if you believe that a close in the S & P 500 below 663.74 on any day between now and 12/3/2012 is extremely remote. If there was one such close, and the index thereafter rallied to say 880 by the closing date, then the hypothetical shown in the prospectus shows the final payment to be $8 for this security, which would result in a loss. For IFO to work there needs to be no close below 663.74. Then in that case, assuming Citigroup survives to 12/3/2012, I will receive at a minimum 12% on the $10 par value plus the $10 principal of the note. (for comparison purposes, this is a link to FINRA information on a fixed coupon Citigroup bond maturing in April 2013, yielding at the current price less than 5%).

Since this purchase increases my exposure to Citigroup Funding by $1,000 more than my comfort level, I will have to sell one of the others owned, a list can be found at Item # 2 Principal Protected Notes.

I also have the possibility of some upside to that 12% provided the market recovers and hopefully resumes an upward path. If the S & P 500 closed at 1300 on the closing date, that would mean a 30% distribution on the $10 at maturity or $13 per share. (see table at PS-14). I put this security in a retirement account to avoid any potential tax issue which is discussed at length in the prospectus.

2. Sold 50 RNRPRD at 22.05 and Bought 50 REPRB at 20.78 (See Disclaimer): I would call this exchange a dispersion of risk in the reinsurance industry. After selling RNRPRD, I still own 50 shares of a preferred stock issued by RenaissanceRe, RNRPRB. /Bought 50 RNRPRB at 24.24 I purchased the 50 shares of RNRPRD at 19.58 in early May and received one quarterly dividend payment.

REPRB is a Trust Preferred of Everest RE Capital Trust II, a Delaware Trust. It is a typical TP issue. Trust preferred securities are sold to the public in order to raise funds for this trust to purchase junior bonds issued by Everest Re. The TP represents an undivided beneficial interest in the assets of the trust which consists of these junior bonds with the same terms as the TP issue. The junior bond and the TP both mature on 3/29/2034. The TP's coupon is 6.2% with a $25 par value. Interest may be deferred for up to 5 years with a typical stopper provision. In any deferral period, Everest Re can not pay a dividend on any junior security, which would include its common stock, or to repurchase any junior security. In effect, the stopper provision means that no deferral can occur for as long as Everest Re continues to pay dividends on junior securities. When you think about it for a moment, this makes sense. I am not familiar with a single instance where a company could continue paying a dividend on a junior security while attempting to defer payment on the more senior one.

This is a link to the prospectus: Final Prospectus Supplement The stopper provision is at page S-23.

Payments will be taxable as interest and hence are not qualified dividends. The RenaissanceRe security which was sold to buy REPRB is a preferred stock, a form of equity, whereas the Everest TP is properly viewed as a bond, more senior in the capital structure than any form of equity. The labeling of the security as a Trust Preferred confuses individuals as to the defining characteristic of this type of security. Yes, it is a prefered stock issued by a trust, but that stock represents an interest in the asset of the trust which is a junior bond.Regular Preferred and Trust Preferred Trust Preferred Securities: Links in One Post

The QuantumOnline site shows the Everest RE TP rated at investment grade by both Moody's and S & P. The

FINRA page for this TP shows a Baa1 rating by Moody's, with Fitch at BBB+ and S & P at BBB.

Interest payments are made quarterly with the next ex date on 6/11: Everest RE Capital Trust II The current yield at my cost is around 7.4. Since a TP has a maturity date, I also have a YTM which is around 7.9% using the Morningstar Bond Calculator and plugging in the maturity date of 3/29/34, the 6.2% coupon, the $25 par value and the cost at $20.78. Needless to say when you have a maturity this far out, there is a lot of interest rate risk. But at least this TP has a maturity date which is lacking from the RenaissanceRe equity preferred stock sold yesterday to fund the Everest Re TP purchase.

3. Swiss Franc-USD: I did an exercise last night to see what would be the impact on the Roche ADR, RHHBY, in the event the Roche ordinary shares remained at the closing price on Tuesday of 157.8 CHF but the exchange rate was as of 3/10/2008, when 1 CHF would have bought .9818 USD. I would divide 4 into 157.8 CHF since 1 RHHBY equals .25 of the ordinary shares, which gives me 39.45 CHF. This gives me a U.S. share price of $38.73 using the exchange rate for 3/10/2008. Of course, it works both ways.

Another issue is the impact of currency conversion on the value of the dividend. When the dividend is paid in CHF and then converted into USD, I will receive more when the Swiss Franc is stronger against the USD, buying more dollars, than when the USD has risen in value against the Swiss Franc. So in the example given above, I would receive more in USD for a dividend paid on 3/10/2008 in CHF than now.

4. Recommendation Made by Jack Albin: I saw this story at CNBC. Albin is the Chief Investment Officer of Harris Private Bank. After the S & P 500 broke 5% below its 200 day moving average, Albin said that individual investors need to sell stocks and move into cash and short term bonds. He maintains that some individuals need to reduce stocks by 30%.

There are a number of short term bond ETFs. Ishares has an ETF that invests in 1-3 Year Treasury Bonds (SHY) with a .15% expense ratio. Ishares also has a 1-3 Year Credit Bond Fund (CSJ) ETF, with a .2% expense ratio, that corresponds generally to the investment grade corporate credit sector in the U.S. And, SPDR has similar products. SCPB is their short term corporate bond fund which has a .12% expense ratio. Vanguard has a short term bond ETF, BSV, with a .12% expense ratio. The problem with short term bonds and bond funds, after the two year Jihad by the Federal Reserve against savers, is that their yield is negligible. While they have interest rate risk, it is less than bonds and bond funds with longer maturities. (Impact of Rising Rates on Bond Prices; discussion starting at page 8: individual.troweprice.com _Spring 2010.pdf; SIFMA discussion at Rising Rates and Your Investments). The modest interest rate risk can be avoided by simply purchasing individual bonds (Fidelity discussion at Bond Funds vs. Bonds and FINRA discussion)

I am not adverse to hiding some in short term bonds. I moved a substantial amount into individual short term bonds in 2007, creating a ladder of 1 to 5 years and then sold all but one of those before moving back into stocks in March 2009, as previously discussed in posts from February through April 2009. The yields then were over 5%, however.

5. Cramer on Pepco Holdings (POM) (owned): In his show yesterday, Cramer mentioned that Pepco, with its 7% dividend yield was his favorite electric utility stock now. He also likes the fact, which I previously mentioned, that POM is returning to its core business of distributing electricity. TheStreet.com POM did go ex dividend yesterday. I have decided to reinvest my dividends on the shares recently purchased. Bought 100 POM at 15.96

Added 70 RHHBY at 34.07-Completing Round Lot/ Swiss Franc-Euro/DFY/BMY/Bernanke's Best Guess on Double Dip/

For a few days last week, I conducted an experiment attempting to ascertain, with some scientific precision, how much gas is wasted by the observed driving habits here in the SUV Capital of the World. I was not attempting to calculate how much gas is devoured by the energy hogs typically driven in this area, fifteen miles per gallon on average would be a good guess, but just the additional consumption generated by normal driving habits. Those habits include speeding, fast acceleration from stops, accelerating into stop lights to arrive as quickly as possible, and increasing speed on downhills rather than coasting to maintain a constant speed within the posted speed limit. The experiment proved that the typical SUV driver loses about 1.3 to 1.5 miles per gallon.

1. DFY (own): DFY is a senior bond issued by Delphi Financial, an insurance company. It is owned in the Roth IRA. I noticed yesterday that Fidelity had divided my shares into two parts. Some of the shares (14 out of 100) were separated out with a notation in parenthesis "when issued money". I assume that means Delphi is performing a partial call, though I have never seen that particular designation in one of my accounts. I have also not seen any press release on the subject.

If this is a partial call, I am pleased to receive some kind of notice. I had a partial call of another bond a few years ago, and sold the entire position after the call was announced without knowing about it. I received a call from the broker a few days later notifying me that I had to buy back the number of shares subject to the call. DFY is a $25 par value bond. Bought DFY at 22.48 Bought 50 DFY at 24.36 I also have a position in Delphi's junior exchange traded bond. Bought 100 DFP at $17.1 I sold 50 of the 150 shares of DFP.

2. EURO Technical Analysis: The Barrons technical analysis highlights the ugliness of the Euro currency chart in his recent column. Using the FXE as a proxy, he points out that the Euro is currently in between two long term support levels, which are 116.75 and 124.6. Given the overwhelming bearish attitude toward the Euro, even after its tremendous decline against the USD, he believes that a short term surprise bounce may be coming, possibly up to the mid-to-high 120s, where the EURO could run into selling pressure.

I am not surprised by the EURO weakness and even initiated a double short position by buying the EUO at $17.17 when the FXE was over 150 and again at 21.73. I have sold those positions. While I am not positive on the EURO, my feel for its current weakness is that the selling is overdone. Europe finalized it plans for the rescue package and is at least discussing measures to punish those nations who stray from the EU's deficit goals, WSJ. The Spanish unions have predictably gone on strike to protect the very modest austerity measures passed by Spain's Parliament with one vote.

What is most inexplicable to me is that the Swiss Franc has fallen against the USD in tandem with the Euro, starting on the same day of November 25, 2009. That must have something to do with guilt by geographic association. (Compare FXF, Swiss Franc ETF Chart with FXE Euro Trust ETF Chart). The Swiss Central Bank bought Euros at a record pace in May in an effort to stem the rise of the Franc against the Euro. MarketWatch

The Swiss economy expanded by 2.2% in the first quarter. Switzerland has a current account surplus of 8% of GDP, a fiscal surplus, and public debt at less than 50% of its GDP.

3. Bernanke on Double Dip Recession: Bernanke believes that his "best guess" is that the U.S. economy has enough momentum to avoid a double dip recession, but that the upturn from the Near Depression will not feel terrific. MarketWatch NYT And he acknowledges that the recovery will be sufficiently slow that job growth will be slow to return.

4. Interview with Fund Manager David Wright: I thought that this interview with David Wright in Barron was interesting. Wright is an older OG than our OG. He is the lead manager for the Sierra Core Retirement Fund. He is like minded to the Old Geezer here at HQ only in his efforts to engage in tactical asset allocation. He does not invest in individual securities but in funds which adds an additional expense layer to his mutual fund. His cash allocation was up to 52.7% as of 5/31/2010. Sierra Core Retirement Fund Holdings My maximum is 30% which I hit in the later part of 2007. He has no stock funds in his portfolio at the current time, believing that the deleveraging process will take some time to wind down.

5. Bristol Myers: Alexander Eule has a favorable column about BMY in today's online edition of Barrons.

S & P raised its BMY rating to buy with a $28 price target.

As mentioned in an earlier post, the main negative is the looming patent expiration of Plavix. Bought 50 BMY at 22.95

6. Average Wage for Census Worker: USATODAY reported that the average pay of census workers is about $18 per hour. Some speculate that this lure may have kept some individuals from accepting lower wage private sector jobs.

7. Added 70 RHHBY at 34.07 USD (see Disclaimer): I received a few days ago a fill of just 30 shares of a 100 share limit order at 35.48 and that turned out okay. I bought the remaining 70 shares this afternoon at $1.4 less per share. RHHBY is the ADR for Roche, the Swiss pharmaceutical company. I did an analysis of the share price in Swiss Francs in my post discussing the 30 share buy. Bought 30 RHHBY at $35.48 If the Swiss Franc rises against the USD five percent I could receive a 5% gain in these shares with the Roche share price on the Swiss Exchange remaining constant. It is important to understand the currency risk when buying both foreign stocks and bonds. The Roche shares have declined on the Swiss exchange since that 30 share purchase, closing at 157.80 CHF, down 1.37% or 2.2 CHF. ROCHE HLDG DR Share Price Chart | ROG.VX It takes four ADR shares to equal one ordinary share. So, four shares at $34.07 would cost without commission 136.28 USD. I converted that amount into Swiss Francs and I arrived at 157.17 CHF: Currency Converter This basically tells me that there is a close relationship between the ordinary share price on the Swiss exchange and the ADR price on the U.S. pink sheet exchange.

The only material news since the 30 share purchase a few days ago was the trial results for Avastin's use in connection with ovarian cancer. Reuters

The Swiss Franc is rallying some against the USD today. One reason for completing the purchase today is my opinion on the favorable exchange rate between the USD and the Swiss Franc. This is a link to the chart of the CHF/USD Currency Conversion since 1999.

Australian Dollar -FXA/WIP ETF/BMY/BP/Fear Trade Now and After Lehman Bankruptcy

1. BP: The The Center for Public Integrity claims that two BP refineries account for 97% of the flagrant violations in the entire refining industry over the past three years.

2. Bristol-Myers (BMY)(owned): The market reacted positively to the trial results from Bristol's melanoma drug released over the weekend. BMY rose $1.42 in trading today. I mentioned in a post from last Thursday that the market did not appear to me to be pricing into BMY's share price any positive results for ipilimumab. Bought 50 BMY at 22.95 Goldman Sachs raised BMY to buy today based in part on ipilimumab driving meaningful upside to current revenue and margin estimates. MarketWatch While the drug does have some side effects, it did prolong the life expectancy of those with advanced melanoma by an average of four months. Melanoma causes the majority of skin cancer related deaths worldwide, with about 160,000 cases dianosed worldwide each year. Another favorable view of the stock can be found at Forbes.com.

BMY is also a component of PPH, which is also owned, with 100 shares of PPH representing an indirect ownership of 18 shares of BMY. PPH is an ETF: www.holdrs.com Pharmaceutical

3. WIP: I sold my position in WIP when I viewed the risks to outweigh the potential rewards. That decision was made in November 2009 based on this analysis:

"Sometimes, I just act on instinct and an assessment of risk/reward. The ETF WIP contains inflation protected bonds issued by foreign governments, and it has enjoyed a good run based primarily on the fall of the U.S. dollar. The price has moved from around $43 in early March to $58 yesterday. Chart I mentioned in a post a few days ago that currency fluctuations would overwhelm any benefit to the inflation protection of those bonds. I also viewed this ETF to be primarily a currency bet against the dollar, with negligible income generation through dividends. (see Item # 4: Foreign Bond ETFs). Given the low dividend yield, and the substantial appreciation based on the recent movement of the dollar, the risk/reward on this ETF tilted toward risk at its current price. At current levels against most major foreign currencies, I am not willing to bet on a continued decline in the dollar." Sold all of WIP ETF-View Risks Now Outweighing Potential Reward

At that time, sovereign risk was not a material consideration. It is material now. I checked the holdings of WIP over the weekend and noted that Greece accounted for 3.09% of WIP's holdings and the bonds were long term: www.spdrs.com WIP_All_Holdings.csv The ETF also had a 4.71% exposure to Italy and 4.78% to Turkey. SPDR DB International Government Inflation-Protected Bond ETF I was looking at WIP against since I view the currency risk of foreign bonds to be swinging back into my favor. However, even though WIP has fallen about 11% from $57.98, the liquidation price of my holdings, the sovereign risk, coupled with the low dividend yield still make it an unattractive investment to me. I am more inclined to consider buying an international corporate bond ETF rather than WIP, when I become more comfortable about the currency risk. My main issues with SPDR Barclays Capital International Corporate Bond ETF are its large weighting in European financials and its low volume coupled with frequently large bid/ask spreads. This may bring me back to BWX, the foreign government bond ETF, by default. BWX is currently trading around $52 and change. My last shares were sold at $59.38 last November: Item # 8 Sold BWX at 59.38

4. FXA: I sold my last batch of the currency ETF for the Australian Dollar,FXA, just 30 shares, at $91.62 last October. Item # 3 Sold FXA I had managed to make several profitable trades in FXA in 2008 and those 30 shares were all that remained from that trading activity. Like a lot of trades, the sell of those 30 shares was too early, but not by much. FXA closed at $93.42 on 11/25/2009 which was the high after the Australian dollar started its bull move after hitting a low of $62.92 on March 2, 2009: FXA: Historical Prices Hedge funds are such lemmings. The trade now is the same fear trade that existed after Lehman's demise in September 2008, which is to sell virtually all currencies and to buy the Yen and the USD, sell stocks and buy U.S. treasury bonds, and sell commodities. The Australian dollar becomes a bit player in the mindless swagger of the hedge fund Masters of Disaster.

{I would hasten to add that there are two noticeable changes in the post-Lehman fear trade and the one now. Gold did not perform well in the weeks and months after Lehman declared bankruptcy: GLD: Historical Prices for SPDR Gold Trust Initially, there was a move to $85.46 on 9/17/2008 from the prior close of $76.79. GLD then drifted back into the 70s during November. By mid-April 2009, it had rallied back up into the mid to high 80s. Since April 27, 2010, GLD has moved from a close of $114.63 to $121.49 as of the close today. The difference is that GLD is showing no signs of retreating which it soon did after the initial pop after the Lehman filing in September 2008. The other difference is that investment grade corporate bonds are doing well so far in this stock selloff, whereas they declined in the pandemonium after the Lehman bankruptcy as the spread between treasuries and investment grade corporates expanded to historic type levels. You can see this by looking at the price action of LQD starting in mid-September 2008}

I am going to add FXA to the very short list of possible buys that were discussed in my last post: Underlying Cause of the Current Long Term Bear Market is Too Much Debt I would prefer to buy FXA than Australian dollars directly. I pay a fee for converting USD into AUD which would probably be more than the expenses charged yearly by the manager of FXA. And, I will be paid some dividends on FXA whereas currency purchases earn nothing in my brokerage account. So, it just makes more sense for me to buy a currency ETF rather than the currency directly when I am placing a short or intermediate term bet on the direction of currency exchange. It does not matter whether my timing is on the mark for several reasons. I would be easing into a 100 share position in three buys. Each buy would have to be an average down. Once the 100 shares is accumulated, I would start reinvesting the dividends. Then, when FXA recovers, the first shares sold would be the higher cost shares bought first. If I was not able to average down with the two subsequent purchases, I would just keep the first purchase until FXA when back over $90 and then sell all of them.

While I view FXA to be undervalued versus the USD at today's price, these downdrafts have a way to build up momentum based on the madness of crowds, group think, and the usual herd behavior. It really becomes a question of feel when to make the initial 30 share purchase, keeping in mind that I am holding most of firepower which would be two subsequent buys of 30 and 40 shares on further weakness. So it may be necessary to bring back the RB as Head Trader. The RB said that it did not feel right today.

I really can not look at a five year chart and pick a spot other than the $65 bottom: FXA ETF Chart A negative is that the fifty day line is crossing the 200 day moving average line, as both move down. Moving Averages - ChartSchool - StockCharts.com (see discussion under "double crossovers). I believe that technicians call this pattern a "death cross", as distinguished from a "golden cross" when the short moving average crosses the longer one to the upside. If the OG was still at the trading desk, this would be enough to keep him on the sidelines, but the LB is in charge now. And the LB knows no fear. LB looks at the FXA chart, and sees a long pattern since October 2009 of movement between $90 to $93 which brings the 50 and 200 day averages closer together. It is not surprising that a fast and sharp break in price would create all kinds of havoc and damage using only technical analysis.

5. Hours Worked Per Week: I mentioned in an earlier post that the increase in hours worked per week was one of the few bright spots from the recent jobs report. JOBS The hours worked per week rose from 34.1 to 34.2. This does not sound like much but I heard Steve Liesman say that extra tenth was equivalent to 400,000 new jobs. Under the circumstances, which includes uncertainty about the sustainability of the recovery and the additional costs associated with new hires which will soon include health care benefits for many small businesses, increasing the work hours of existing employees makes sense. However, a longer work week is of no consolation to 45% of the unemployed who have been out of work for more than 27 weeks, a staggering number from a historical perspective as shown in the graphs in this Washington Post article. The total number of long term unemployed stood at 6.8 million in May: Table A-12. Unemployed persons by duration of unemployment The number of discouraged workers, those who have just given up trying to find a job, surged for the first time to over one million. CNBC

With the decline in the stock market, I have started to change the dividend option on more securities to reinvestment in additional shares from payment in cash. It would not be surprising to see a strong counter-move to the prevailing down trend. If that occurred, I would not sell into it, but would instead be looking for another double short to buy as a hedge. I have already done most of the selling that I intend to do.

Underlying Cause of the Current Long Term Bear Market is Too Much Debt

Friday was a good test for measuring the volatility of my portfolio. I respect the power of the bear and view it as important to lose less than the market averages on down days and hopefully move up more on up days. The more appropriate measurement is the returns over cyclical bull and bear cycles. But those cycles are made up of days, so I start by looking at a day's performance. It is extremely important to avoid losses anywhere close to a year like 2008. Losing less is sometimes the best available option. Yes, this is easier said than done.

During a long term bear market, I would place an emphasis on how well the portfolio does during the down periods. Personally, when the current long term bear market comes to an end, which eventually will happen, I would view my management of the portfolio to be a success with anything over an annualized 5% return after inflation during that bear cycle which I start in 1997. To achieve that result, which I will do, it is important to participate in the frequently powerful up moves, which can be among the largest percentage moves over short periods of time in any market cycle, but I am always mindful of the defining characteristic of a long term bear market. It giveth those gains and then taketh them away. This happened fairly quickly for all of the market gains from 2003 to October 2007 in the period after Lehman's demise. This is a stock market version of this passage from JOB 1:21 (King James Version): "And said, Naked came I out of my mother's womb, and naked shall I return thither: the LORD gave, and the LORD hath taken away" Job 1:21 Ultimately, the buy and hold investor will end up going nowhere during these 15 or so year bear cycles and may end up worse off by investing at or close to the top of the range or panicking and selling at or near the lows. One thing is clear from history. The buy and hold approach, using the S & P 500 as a proxy, will end up losing around 1% per year after inflation with dividends reinvested over the duration of a long term secular bear market. (see data at The Roller Coaster Ride of the Long Term Secular Bear Market) This bear market will end up to be no different than the prior ones unless policy mistakes are made by governments to prolong it.

On Friday, the S & P 500 fell 3.15%. My retirement accounts were down less than 1%, and I am happy with that result. The taxable accounts fared less well, falling about 2%. I have been checking this data since late April on the major down days. This will cause me to make some shifts to lower risk and volatility based on how the portfolios due on down days. Recently, readers of this post would have noticed the purchase of several bond funds, which I really hate to do, Canadian ETFs that invest in Canadian government and corporate bonds, more individual bonds and preferred stocks, and a few dividend paying blue chips. Several securities viewed as having more risk, or paying negligible or no dividends, have been jettisoned. This included all of the mutual funds in the retirement accounts. I am disgusted with their overall performance in up and down markets anyway. The overall effect is to lessen volatility and to improve cash flow into the accounts. Those transactions are part of that ongoing process.

I did raise some cash on Friday and added a double short. SOLD: AMAT, ATVI, MRO, JPC, ZBPRA/Added Double Short as a Hedge My purchases over the remaining part of June will be extremely modest.

I may use the weakness in shares of certain exchange traded principal protected notes to add to my current positions. Also, assuming the dollar index continues its parabolic move and comes close to 90, I may start to slowly buy back shares in an international bond fund, having liquidated my positions in both WIP and BWX. The Dollar Index & Foreign Government Bond ETFs WIP & BWX I may just skip WIP and BWX, due to their low yields, and buy an international corporate bond ETF. The dollar index closed Friday at 88.26. DXY And, I am mindful that an opportunity exists to hedge my long term corporate bond portfolio with a a double short buy of TBT, which fell 5.35% in price last Friday to $38.73. I do not currently have a position but my last entry point was at $36.68 in December 2008: TBT

I hope to invest about $1000 in existing positions in the regional bank strategy. Several of the positions were pummeled on Friday. I also changed some positions in this basket to reinvestment of dividends from payment in cash.

Another possible add this month will be to increase by BMY stake from 50 shares to 100 shares, after seeing how the market reacts to the trial results, released over the weekend, for BMY's drug ipilimumab, used to treatment melanoma, as well as the use of Sprycel as a first line treatment for chronic myeloid leukemia in lieu of Gleevec, WSJ. The results look good to me but I will take my cue from how the market reacts. Science and medicine, while interesting to me, are topics where my knowledge is woefully lacking which is more than understatement. I mentioned in a post from last Thursday that the OG did not think the market was pricing positive results into the BMY share price: Bought 50 BMY at 22.95. The Old Geezer sort of understands valuation issues. (more on the trial results for ipilimumab: Reuters)

My only other purchase for the month of June may be JNJ. I almost purchased 100 shares near the close on Friday when JNJ fell to less than $58. I am targeting a possible 100 shares purchase. This will bring me up to 150 shares.

I view the best buys now to be large American multinationals with good balance sheets and stable businesses, selling at very low multiples and and near a 1 PEG. Item #3 Large Cap Valuation Strategy-A New Long Term Strategy The general idea is to try and use volatility to my advantage. When JNJ recovers to $65+, and eventually it will, I will sell the 50 shares bought at a higher price using FIFO accounting, and keep the lower price shares. This will require some patience. I will also change my dividend distribution option to reinvestment in additional shares once I exceed a 100 share position.

My main concern is what happens after the fiscal stimulus winds down in the U.S. Over 100,000 jobs have to be created per month just to handle new entrants into the work force. An increase in private sector employment of just 41,000 is just inconsistent with a self-sustaining economic recovery at this point in time. This has occurred after almost 1/2 of the 700 billion stimulus package has been spent (CNBC) and after a prolonged period of the federal funds rate being kept at zero. It has occurred after a large quantitative easing program implemented by the federal reserve, and numerous other programs to spur economic growth. And, when the nation is running budget deficits in the 1.3 to 1.5 trillion dollar range, the option of spending more money to jump start the economy is just not practical. So, with the fiscal bullets nearly spent, we are at a crossroad, either the private sector will start to pick up the slack soon or the likelihood of a another recession is likely. With another sickly jobs report next month, I would put the odds at 75% of a double dip recession starting within the next year.

Part of the problem is the incompetence of politicians. The nation is in need of massive infrastructure spending on bridges, roads, water and sewer plants, and other projects. Instead of spending most of the 700 billion in "stimulus" on these projects which would have long term benefits, and would provide jobs for years, the Democrats barely scratched the surface in funding these projects in their stimulus bill, and instead focused on temporary transfer payments to states and individuals. Maybe the states needed to downsize their workforce anyway. And, it would be helpful for many of those state employees falling victim to the budget ax to get out in the fresh air and receive a free tan, learn to use a shovel and to help build something.

The lesson to be learned from the past decade has not been learned at all in developed nations until recently and now only grudgingly by certain governments and only a portion of their population experiencing an awakening. For the most part, large segments of the population believe that they are entitled to all of their benefits even when the government has no money to pay them.

Even now, I suspect most Democrats are just paying lip service to the need for fiscal responsibility and belt tightening. Nothing was gained over the long term by the profligacy associated with spending an ever expanding amounts of borrowed money by governments and individuals. At most, the over leveraging process created an illusion of self-sustaining growth and has left a debt induced hangover of massive proportions.

The underlying problem causing the long term bear market which started around 1965 was inflation. The problem was allowed to fester and to grow, until finally the federal reserve quashed it in the late 1970s and early 1980s. Reagan received most of the credit for the Federal Reserve's work. Once inflation was tamed, then, and only then, could the market start a long term bull cycle.

The problem now is too much debt, almost entirely by self indulgent developed nations in Europe and the U.S. of course. The problem was obvious when the Asian contagion started in 1997, one of the reasons why I date the current long term secular bear market as starting then. Dating the Start of the Current Long Term Secular Bear Market The developed nations failed to learn anything from what happened in 1997 and again in 1998, perpetually willing to indulge their population by spending ever increasing sums of borrowed money. Instead, they accelerated their borrowing as did their citizens. In the U.S. millions bought homes that they could not afford and debt reached an almost unimaginable 130% of disposable income in late 2007, after being in a narrow range of around 60% between 1961 to 1985. (first Chart at www.invescoaim.com/pdf)

At least the problem is starting to be recognized in the Western Democracies, at least by the governments. It is interesting to watch the Greeks complain about any sacrifice by their bloated government workforce when their government was obviously broke. Eventually, sovereign and individuals exhaust their credit line. This has occurred in Greece and started to occur in the more vulnerable nations in southern Europe. None of the developed nations are immune from the problem of dealing with a population unwilling to make sacrifices and lenders unwilling to finance their generous benefits, with Hungary being just the latest example of a nation dealing with this conflict. NYT There are a few exceptions among western democracies, such as Canada, Germany, Australia and the Netherlands who have been far more sensible in spending borrowed funds than the other western nations and their citizens. Bill Gross has an excellent discussion of this growing problem in his February 2010 "Ring of Fire" newsletter.

I am actually not worried so much about Europe, where there is at least a recognition of the problems and some baby steps have already been taken to reign in out of control spending. The big problem is not Europe but the U.S. government and its citizens who have shown no voluntary restraint in spending. Sure, a large number of individuals who spent more than they earned, used their homes as ATMs, or bought a home beyond their means, or hit the maximum limits on their multiple credit cards, have had their spending restrained involuntarily, as in forced upon them by having the credit spigot turned off. But, it is hard to characterize the federal government, running over 1 trillion dollar budget deficits, as having learned anything -yet- from the past 30 years, starting with Reagan's presidency when fiscal discipline started to break down in a major way. What Will Produce Growth after the Age of Leverage? The end game of what started in 1980 has yet to be played. Taleb may be right in predicting that the mother of all Black Swans will be the day the U.S. tries to sell more debt and the auction fails. ITEM # 5 The U.S. budget deficit was 1.4 trillion for the fiscal year ending in September 2009 and is currently projected to top that horrendous number for the fiscal year ending in September 2010: Reuters (this site has a table of the historical numbers of the U.S. annual deficits as a percentage of GDP since 1900: US Federal Deficit As Percent Of GDP in United States 1900-2010)

When looked at objectively, the politicians of both tribes are irresponsible, though in somewhat different ways from time to time. Hopefully, before Taleb's fear is realized, worldwide growth will resume, spurred by the growing middle class in emerging countries and modest inflation will gradually erode the potential seriousness of excessive debt levels. Paying creditors back in debased currency is always an option for profligate spenders of borrowed money.