Sold Lottery Tickets: RMIX, CBR, NYT and Timberwest/SOLD 50 AEB AT 19.7/ Case Shiller/Retail Earnings/MDT JOE

Since starting this blog back in October 2008, I have repeatedly discussed floating rate securities and trust certificates. I started to buy those securities with some gusto in September 2008 because I viewed them to offer good buying opportunities for the individual investor. Before September 2008, I had bought and sold a couple of them such as XFL. Those buying opportunities lasted to varying degrees for about six more month after I started to discuss them. Although I have added some floaters and TCs after April 2009, those additions were mostly a response to the two year Jihad undertaken by the U.S. Federal Reserve against responsible Americans who had saved their money, spent prudently, and took on reasonable amounts of debt given their disposable income.

When I started to invest in TCs in 2008, I barely knew anything about them. I knew that they existed, and I had about five of them on a monitor list at that time, more now of course. I also took the time to understand their basic legal structure which anyone can comprehend once a decision is made to take the time to read a prospectus, which many investors unfortunately do not want to do. I mention this history in passing today to highlight a point. If you do not know about a type of security, such as equity floating rate preferred stocks or Trust Certificates, you will never be in a position to know whether or not a buying opportunity is being presented to you at a particular point in time. That is sort of an obvious point but an important one nonetheless. So, even if an investor decides to pass on the floaters due to their tremendous rise in prices since October 2008, it is nonetheless important to understand these securities in order to make an intelligent decision as to when they present a buying opportunity in the future.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities

Trust Certificate Links in One Post

Synthetic Floaters

The same can be said for other types of income securities, such as exchange traded baby bonds, trust preferred securities and European hybrids.

Aegon Hybrids: Gateway Post

ING Hybrids: Links in one Post

Trust Preferred Securities: Links in One Post

Exchange Traded Bonds:

1. ST. JOE (JOE)(owned): My position in JOE was bought in March 2009 at $15.69. I am not going to make a decision about what to do with those shares until after the currently unrealized gain turns into a long term capital gain. This company is primarily an asset play. Back in March 2009, I roughly calculated the value of its Florida land at $50 to $55 per share, using the valuations discussed in that post. The company then owned 420,000 acres of land within fifteen miles of the coast, and about 75,000 of those acres are located around Panama City. The company has been hurt by the downturn in the real estate market, and that is reflected in the poor results announced for the 4th quarter of 2009. The St. Joe Company reported revenues for the 4th quarter of just 37.1 million and a net loss of 65 cents per share. As of 12/31/2009 St. Joe owns 577,000 acres and 405,000 of those acres are within 15 miles of the Gulf of Mexico coast.

2. Medtronic (MDT)(owned): Medtronic reported that net income increased by 19% in its fiscal 3rd quarter and its E.P.S. rose 21% to 75 cents per share (77 cents excluding items), up from 62 cents in the year ago quarter. Revenues rose 10% to 3.85 billion, slightly below the consensus forecast of 3.87. Adjusted for the impact on revenues relating to foreign currency exchange rates, revenues rose 6%. The E.P.S. number was 1 cent better than the forecast using the non-GAAP number of 77 cents. MDT raised the low end of its fiscal 2010 forecast and now expects earnings of $3.2 to $3.22. The fiscal year ends in April 2010. For F/Y 2011, the current estimate is for an E.P.S. of $3.52. At a $44 price, this would translate into a forward P/E for F/Y 2011 of 12.5. At a $42 price, the P/E would be 11.93.

3. Retail Earnings: I do not own common stock in any retailer, and currently own a Macy's senior bond in TC form as my sole security in this sector. I am however interested in how the retailers are doing since that data is a relevant input to my overall macro economic view which is a critical component of how I manage my money.

The retail earnings released today were good:

Sears Holdings (SHLD) beat by 15 cents earning $3.69 per share in the 4th quarter.

Target beat the estimates by 8 cents earning $1.24 per share in its 4th quarter.

Macy's beat the consensus by 8 cents with earnings of $1.10 per share.

The Home Depot beat by 7 cents and raised its dividend 5%.

4. Case Shiller Index: This index of home prices in 20 large metropolitan cities rose .3% from November to December, but is still down 30% from its peak in May 2006. On the bright side, the index has risen 3% from its bottom in May 2009. standardandpoors

5. Sold Some Lottery Tickets : RMIX, Timberwest, New York Times, Ciber (See Disclaimer): I am a tad lazy today. I am not going to go into any detail on these sales, except to note the following. RMIX and CBR were sold at a small loss, and I netted those out with gains on NYT and Timberwest. I was disappointed with CIBER's earnings report this morning. U.S. Concrete (RMIX) looks like its financial problems have taken a turn for the worse. It looks to me like RMIX is headed toward one of the highly dilutive exchange offers with bondholders. (See Posts on Buys: Buys 50 TMWEF at $3.24/ Buy of 25 NYT at $7.08, / Bought 100 RMIX AT $1.57: Speculative Lottery Ticket/ Buy of 50 Cyber at $4.5/)

LOTTERY TICKET PURCHASES: LINKS IN ONE POST

6. HRPT Properties (own common HRP and senior Bond HRPN): HRPT Properties reported FFO for the 4th quarter of 27 cents, one cent better than the consensus. Revenues fell only 2.3% to 213.3 million, better than the 207.6 million consensus.

7. Consumer Confidence: The report from the Conference Board on consumer confidence placed downside pressure on the market today. In a healthy economy, the number would be in the mid 90s. Economist were expected a reading of 55.5. The number plunged to 46, its lowest reading since April 2009. The present situation component fell to its lowest reading in 27 years.

8. Disparity Between Top 1% of Americans and the Bottom 90% Grows: This article and chart from the Center on Budget and Policy Priorities illustrates in graphic form the gains made by the top 1% of Americans, and how the bottom 90% continue to participate less. The top 1% reaped 2/3rds of income gains from the last economic expansion, and their share of the nation's income growth increased to Great Depression levels.

9. Sold 50 of the 350 AEB at $19.7 (See Disclaimer): The unrealized profit on this security has just become too large to ignore entirely. So, to feel better in the case it turns south, I sold 50 of my 350 shares. See, generally Aegon Hybrids: Gateway Post for discussions of AEB and other Aegon hybrids currently owned by me. AEB has turned into a very successful investment with buys in the $4 to $8 range. The shares sold yesterday were the highest cost shares bought in September 2008, and the gain was a long term capital gain.

10. Continued Long/Short Strategy: I am not going to mention the specific double short ETFs on some of the sectors and countries that I have started to buy. I did mention recent buys of TWM and SDS, but do not plan to mention the more narrow names. I bought today one sector specific and another country specific double short ETFs that have just been mauled since March 2009. These Proshares products are notorious for losing index tracking after one day, and the sector and country specific double short ETFs appear to be worse than the ones that track major indexes. I will be using some of the sector and country double shorts to hedge a possible, though unlikely, major downdraft. If one of the double short ETFs deviates too much from tracking the index, which I will monitor daily, then that would be a reason for selling it. I understand the risks of these products, and their limitations. I am not set up to short indexes or to buy options, which leaves me with these products. ProShares ETFs: Products I am already in a position to take some short term losses since I have realized gains this year so far of close to 10 grand so I can net out some losses on these products. It is therefore no big deal to lose a thousand or two on this type of insurance. Possibly, I need to establish a margin account with the ability to trade options. But, I have been a cash only investor my entire life and I may be too old to learn a new trick.

Bought 100 of the ETF EWH at 15.15/ BOUGHT 100 ETF EWS AT $10.9/Added 100 of the CEF IGI at 19.78

1. Bought 100 of the ETFs EWH at $15.15 and EWS at 10.9 Today (Asian Strategy) (see disclaimer): The buy of EWH was in one of my satellite taxable accounts with a financial institution, which used to be entirely devoted to bank CDs and a savings account. I responded to a promotion for an online brokerage account after several of my CDs started to mature and the reinvestment rates were not close to being even slightly tempting.

EWH is an an ETF for stocks listed on the Hong Kong exchange. Admittedly, it would have been better to to buy EWH when I bought EWC, the ETF for Canadian stocks in March 2009: Buy of EWC & BAM/ At that time EWH was selling at around $9: iShares Trust (Barclays Global ETF Chart

This purchase is just another way to play my investment thesis for the next long term secular bull market, where I believe Asia will be the main driver. No one knows for sure whether the rally off the March 2009 is the start of a new long term secular bull market or just another cyclical bull in a long term secular bear market. My personal belief is the current worldwide rally in stocks is a short duration cyclical bull move within the context of a long term secular bear market which started in 1997. By short duration, I am referring to a period of 1 to 2 years reminiscent of the counter-trend cyclical bull move off the October 1974 lows. I realize that any prediction about the future can be wrong, or even way-off. Since I also believe at the present time that the catastrophic phase of the long term bear market is behind us, and we are relatively close to the end of that cycle, I am willing to be more adventurous than in 1976, when my overall response was to mostly keep investing in CDs until the summer of 1982 when I formed a judgment that the most important economic act of the era was going to be successful. I do not mean Reagan's tax cut, but the efforts of the Federal Reserve to eliminate serious inflation. I would not mind having a 14% 3 month CD rate now, and I did receive some rates like that back then.

Back to EWH, when picking an ETF with exposure to China, I shy away from FXI which has a lot of exposure to banks. EWH has a lot of exposure to financials, but a lot of those holdings are properly characterized as non-bank financials such as real estate companies. iShares MSCI Hong Kong Index Fund (EWH): Holdings The expense ratio for EWH is .55%. iShares MSCI Hong Kong Index Fund (EWH) I can trade stocks on the Hong Kong exchange and have some familiarity with a few of the companies. Also, several of them are available on the pink sheet exchange, and I follow several of them including Swire Pacific Ltd.( SWRAY), Hang Seng Bank Ltd. (HSNGY) and Sun Hung Kai Properties Ltd. (SUHJY).

The China ETFs were the subject of a recent article at IndexUniverse. (I read an interview while visiting that site today with Rob Arnott who believes treasuries may continue to work over the short term, since he views that inflation numbers will be benign in the months to come, primarily due to the 40% weight in CPI to the fictitious owner's equivalent rent and rent)

I also added today, with a limit order filled at $10.9 near the close, 100 shares of the ETF EWS which contains stocks from Singapore. This ETF has an expense ratio of .55%: iShares MSCI Singapore Index Fund (EWS) As noted in this article from BusinessWeek, Singapore has strong economic links in the Asia-Pacific region. Other holdings in the Asia Strategy include the CEF IAE (150 shares), held in both the taxable and retirement accounts and a recently purchased mutual fund from Matthews, the fund complex that focuses on the Asian countries. {see e.g. /Bought 50 of the CEF IAE; Bought Matthews Asian Growth and Income (MACSX)} I also own shares in Matthews India (MINDX) and Matthews Pacific Tiger (MAPTX). This is not an area of the world where I will do much in the way of individual stock purchases, with minor exceptions possible for companies located in Australia, Hong Kong, India and New Zealand. I will be increasing my exposure to this area of the world during 2010.

I would not add to the CEF IAE now since it is selling at a premium to its NAV. ING Asia Pacific High Dividend Equity Income Fund - Overview I will always, however, considering selling a CEF bought at a discount to its net asset value when it starts to sell at a premium. That has been part of my closed end fund strategy since I bought my first one, ADX, back in 1984.

2. Added 100 of the CEF IGI at $19.78 (see Disclaimer): This is a term CEF bond fund, which simply means that it has an expiration date. One of the major problems with bond funds is that they generally lack a maturity date. Sure, the bonds in the fund have maturity dates, but the investor does not own them. If bonds enter a long term bear market, where prices fall and yields rise, I would expect most bond funds to lose value, some more than others. Depending on the duration and the severity of the rise, I would expect many of them to lose more in value than they pay in dividends, potentially by a substantial amount with a significant rise in rates and for a fund holding long bonds. This would also be potentially significant given the low rates now. It would not take much of a loss in share value to wipe out an annual interest rate. Taking those factors into account, I want to at least have the option of holding a security until a certain date, where I will receive my original principal back, as would be the case with an individual bond when the firm is capable of paying par value at maturity, or all or most of my principal in the case of a term bond fund. There is no promise to pay back what I have just paid for IGI, but there is at least the assurance that the manager of the firm knows that it will be liquidated in 2024 and will hopefully manage it with that term date in mind.

I recently bought IGI in the Roth and I discussed it at that time: Bought 100 CEF IGI at $19.89 The purchase today was in the main taxable account, an Old Geezer kind of buy, to add to the generation of cash flow in that account. IGI pays dividends monthly. As of the close last Friday, it had a NAV of $20.32 and was selling at a discount to NAV of 2.26%. Closed-End Funds by Category - Markets Data Center - WSJ.com The fund closed Monday with a NAV of 20.33 and was selling at the close of trading today at a 2.26% discount to its NAV.

This is the link to the last annual report filed with the SEC: www.sec.gov/ The fund does not use leverage. The fund's objective is to liquidate in December 2024 and to hold at least 80% investment grade bonds.

The schedule for the next dividend payments are set forth in Western Asset Investment Grade Defined Opportunity Trust Inc. ("IGI") Announces Distributions for the Months of March, April and May 2010.

3. Filibuster Rule in the Senate: I would agree with Senator Bayh that the Senate needs to change its filibuster rule which allows a determined and obstructionist minority to block even routine legislation. Bayh proposes that the number of votes needed for closing debate be reduced from the current 60 to 55. This is not likely to happen, however, because it would require a two-thirds vote in favor of the amendment. Filibuster

Today, the republicans in the Senate tried to filibuster a modest 13 billion dollar jobs bill and almost succeeded. By using the filibuster rules the minority party prevents legislation from ever coming to a final vote, and 60 senators have to vote on a cloture motion to stop the filibuster. The jobs bill would give employers a 1 thousand dollar tax credit for each new hire who stays on the job for a year, and allows employers to avoid paying social security taxes on near hires who have been unemployed for at least 60 days. Senate Thirty republican senators voted against cloture. Since the GOP is a group think kind of organization, it is rare to have a defection from the party line. If three GOP senators had not defected to join the democrats in voting for cloture, this very modest jobs bill would not have made it to a final vote.

Buy and Hold or Dynamic Asset Allocation/Trading: Long Term Secular Bull and Bear Markets/ Australian currency and the Carry Trade

1. LONG TERM BEAR AND BULL MARKETS: When to Buy and Hold/When to Transition to a More Dynamic Process: This is an important topic that is frequently discussed in my blog, and I believe it is worthwhile to summarize some of my thoughts. I know that many investors focus their attention on what stock to buy or to sell, or the new hot mutual funds. The most important decision is the one involving the big picture, and I don't mean the particulars of your own circumstances looking out into the future. I am talking about the ebb and flow of historical events that are the the most important factors to understand. And the most important big picture category is whether stocks are in a long term "secular" bear or bull market, and the underlying reasons why stocks are in one or the other.

If I had enough money to make an initial investment in the S & P 500, and hold for sixty years or so without having any situational risk that would require me to dig deep into those funds, a buy an hold strategy advocated by the likes of Professor Siegel or John Bogle might make sense. Starting on 1/1/1951 through 12/31/2008, the S & P 500 would have had an annualized return with dividends reinvested and after inflation of 6.49%. CAGR of the Stock Market: Annualized Returns of the S&P 500 While I was born in 1951, I did not have any money to invest at that time, nor did I have any significant funds for the next twenty-five years thereafter, which sort of cuts down on that 60 year time span. I started to invest when I was 16 with money saved working in the summer at less than $2 per hour so not a great sum to start.

As I mentioned in several prior posts, the problem with buy and hold is that there have been lengthy periods since 1951 when my average, annualized, inflation adjusted return would have been negative. I will break the periods into what I would characterize as long term bear and bull markets from 1/1/1949 with dividends reinvested:

1/1/1949 to 12/31/1965: 14.4% annualized after inflation

1/1/1966 to 12/31/1981= -1.04% annualized

1/1/1982 to 12/31/1997 (part of those years I would not include): 14% annualized after inflation

1/1/1998 to 12/31/2008: -1.44% annualized

Maybe investors need to focus on the foregoing more. During the long term bear cycles, the returns would be worse for an investor who, for example, was buying stocks in October 2007 at the tail end of a cyclical bull move within the context of a long term secular bear market.

As a reminder, I define a long term secular bear market as consisting of several cyclical bull and bear cycles of relatively short duration, at least one catastrophic phase (losses exceeding 50%), with the end result after fifteen or so years to be a negative inflation adjusted return and/or the nominal average close to the starting point of the period. I would just add around five years to the average duration of a secular bear market for an event like the Great Depression:

1/1/29 to 12/31/1948 + 1.33% S & P after inflation and with reinvestment of dividends.

Jan 1929 DJIA 317.51

Dec 1948 DJIA 177.30

The chart patterns of a long term secular bull and markets are contained in prior posts:LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression More on 1982 or 1974 (and see: 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market?).

The depression years were marked by several years of deflation. Reinvesting the dividends during the down years would have helped the overall return when the market started to recover in 1942 with a more sustainable up move and less severe shocks to the downside. (As I recall, the pivot point was the American victory over the Japanese navy at the Battle of Midway in June 1942. On June 1, 1942, the DJIA was at 104 and had risen to 212 by May 1946).

A. Some Reasons for Recent Cycles: There are many reasons why these long term cycles repeat themselves. One reason is that most people never really learn much of anything from history. It is more interesting when they fail to learn anything which is worthwhile from current history which they experience as adults. Their minds are simply closed to information or analysis free from ideological predispositions.

Another explanation would be just to say that the seeds of the long term bear market are planted during the long term secular bull market. A lot of mistakes can build up in the euphoria of a long term bull cycle for the economy and stocks. One of the worst things that could happen to homebuilders was to have good years fairly solid from 1992 to 2006. So, many of the them lost everything that they made in 15 years during the next two.

Psychological issues also become important during the later stages of the long term bull cycle, as greed and stupidity become the dominant emotions in the investment process. Would you now characterize the Nasdaq valuations from 1999 as smart or stupid? The market is taken to a point when valuations are clearly excessive. This was the case in 1999 (and 1969 or 1929) for the stock market.

The bursting of the stock market bubble in 2000-2002 masked the underlying problem that was both the foundation of the long term bear market starting in 1997 and a propellant for the bull market starting in 1982. One propellant for the bull cycle was ever increasing debt incurred by American consumers, whose spending represented about 70% of U.S. GDP. The U.S. government, starting with the Reagan administration who increased the national debt by over threefold during his 8 years in office, started to run large deficits during several administrations. Both of those events were the catalyst.

I have previously referenced the following linked chart that shows household debt to disposal income in the U.S. since 1961. /www.invescoaim.com/pdf/ConRec.pdf Between 1961 to 1985, household debt fluctuated around 60% of disposable income, give or take a few percent. Starting in 1985 (the long term secular bull market started in August 1982), the ratio moved from 64% in 1985 to 133% in 2008. The U.S. was not alone in fueling economic growth by borrowing and spending ever increasing amounts of money. It was a widespread phenomenon particularly in developed economies around the world and encompassed both individuals and their respective governments, as in the U.S.

After the end of WW II and prior to the commencement of the Reagan Presidency, every administration starting with Truman and including even the much maligned Jimmy Carter, had reduced the nation's debt as a percentage of GDP during their respective terms. National debt by U.S. presidential terms That trend reversed during the two terms of the Reagan administration and accelerated into George H.W. Bush's four year term. The Near Depression in 2008 and its aftermath will merely accelerate the day of reckoning for the U.S. government.

The American consumer is basically tapped out as the engine for worldwide growth. The American government, now incurring annual deficits per year greater than the total debt that the nation incurred from 1776 to 1980, will have to retrench soon. Within a few years, the American consumer will have their balance sheets in much better condition then now and will be able to resume a higher and more normal level of spending. However, they will be far less important as engines of worldwide growth in the coming decades than during the fifty or so years following the end of WWII. I would further expect joblessness to remain at historically high levels for years to come in the U.S.

The next next long term bull market will have as its impetus spending by consumers and governments in what is called emerging markets now, but a new name will have to be assigned to them in years to come. For the growing middle classes in those countries, the question is when will their numbers increase to the point of being able to sustain long term worldwide economic growth, similar to the role played by the American consumer prior to 2008. My guess is that the mass will reach a flash point in another two or three years. This topic is of course not original with me and I have referenced some studies by Goldman Sachs on this point in previous posts: BRICs (Goldman Sachs) & www2.goldmansachs.com/ideas/global-economic-outlook/expanding-middle.pdf

Another major impetus in the previous long term bull (b. 1982 & d. 1997) was technological innovation primarily in computers which improved productivity, and helped to keep inflation low. It was also invaluable to have a federal reserve chairman, Paul Volcker, who stamped out hyper inflation and provided the necessary monetary conditions for the economy to grow in a sustainable and healthy way, with the importance of technology, increasing debt levels, & federal reserve monetary policy often overlooked by the True Believers in assessing what actually happened during the 1980s. More Meanderings on Corporate Tax Rates & The Multitude of Factors Impacting Growth.

Now, the TBs, holding opinions with the ferocity of a religious zealot, believe that Bush's tax cuts were the path to perpetual growth. To the extent there was any growth during the Bush years after those tax cuts, it was due primarily to ever increasing levels of debt and by the spending of those borrowed funds. The end result was a Lost Decade-no job growth, no asset growth and the average family would be worst off in 2010 than in 2000 Also A Lost Decade for Jobs & Income Growth Adjusted for Inflation W's News conference: Reflective or disingenuous? What Will Produce Growth after the Age of Leverage? (WSJ article: Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ and WP article: lost decade for U.S. economy, workers).

I am not making a political statement about republicans and democrats and their respective levels of fiscal irresponsibility. Instead, I am just talking about investment cycles and some of the reasons that they occur with regular intervals. Fifteen years is about how long it takes for greed and stupidity to gain the upper hand and administer the coup de grâce to the long term bull market. Then it takes about 15 years to work through all of the problems created during the bull cycle, with the most important one from the last cycle being the exponential and improvident growth of credit and leverage.

If I was going to make a long term political prediction, I would just say that the GOP will take control of the Senate and the Presidency in 2012, assuming they are not really stupid with their nominee for President by selecting someone like Sarah or Glen Beck, which just caused me to cringe after just writing that, and the GOP will gain control in the House decisively in 2014 (possibly by a narrow margin in 2012). The GOP will receive the credit for a long term recovery which will start at the end of the Beanpole's first and last term by a majority of the American electorate, even though they would merely be the beneficiary of fundamental economic forces that have nothing to do with their ideology and policies, much like what happened in 1982, except the forces at work in 2012-2014 will be occurring outside our borders.

B. Impact on Investment Decisions: Unless the objective is end up in fifteen years about where you started with your investments, it is clear that buy and hold is not a viable strategy during a long term bear market cycle.

Possibly, an investor needs to try an identify the possible onset of a long term bear market as situational risks increase for that investor. Those risks include using stocks as a source of income during retirement or to pay major expenses such as a college education for your children. But, I would say that it behooves all investors to make the best judgment possible on this issue.

During a long term bull market, buying and holding stock index funds, reinvesting the dividends, would be a defensible approach and probably the most sensible one. It would probably not be a good idea for individuals to try and time the market during that long term bull market, recognizing that the bear corrections will be relatively short in duration and difficult to time anyway by moving out before they occur and back in before the market resumes its long term secular uptrend.

One helpful marker is simply the duration of the long term bull market. After fifteen years of a long term bull market, it is probably best to become cautious about stocks and to look around really hard and seriously for potential problems that could undermine the continuation of the uptrend. But, let's say hypothetically speaking, that the investor saw problems in 1997 and sold at least some of the S & P 500 index bought on 1/1/1982. The non-inflation adjusted return with dividend reinvested would have been approximately 17.91% annualized or 14% after inflation. That works for me. Now the inflation adjusted return from 1/1/1998 through 12/31/2008 would have been - 1.44%.

While many will disagree, including all those who adhere to the recommendations of Siegel and Bogle, I think that it is possible to maintain a stock allocation during the long term bear market, but a more dynamic trading process has to be used to significantly reduce the stock position during the short term cyclical bull moves and to reposition the portfolio by buying during the short term bear cycles, particularly during the catastrophic phase of the bear market where longer term stock positions can be acquired and held for the long term (i.e. summer of 1974 or 1932, early 2009). That means that cash has to be on the sidelines during such a period.

Also, it is important to identify which asset classes will likely hold or increase their value during the bear phase, and which will run with stocks, both up and down. What asset classes will be highly positively correlated with stocks and which will be negatively correlated or have low positive correlations? During the cyclical bull move starting in March 2009, commodities, foreign currencies like the Australian Dollar and the Canadian Dollar, and emerging markets have had a high positive correlation, at least until mid January 2010, and this was also true during the down period for stocks between September 2008 to March 2009.

My Vix Asset Allocation Model is primarily a timing tool for reducing stock exposure during a cyclical bull move after the occurrence of a Trigger Event. The cyclical bull move which ended in October 2007 was preceded by a Trigger Event in August 2007: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Vix Asset Allocation Model Explained Simply With as Few Words as Possible The model also flashed a Trigger Event prior to the 1987 crash: Parallels to VXO 1987-1988 It gave a green signal in early 1991 and did not have a Trigger Event until 1997. More on VIX AND ASSET ALLOCATION VIX and S & P Compared 1990 to 1997 A green light was then given in 2003 until the trigger event in August 2007: Multiple Confirmations of VIX Model-Canary in a Coal Mine

I did reduce stock exposure in 2007 in response to the signal given, and repositioned those funds into bonds and cash. (e.g. discussion in October 2008 Post: Buy High & Sell Low /Retrospective on the Good & Bad). I redeployed some funds back into stocks during the catastrophic phase of the cyclical bear cycle in March 2009, as discussed in numerous posts from March and April 2009: Stocks & Politics: March 2009 Stocks & Politics: April 2009

I would have to say that it is far, far more difficult to stay ahead in a long term bear market. Any fool can make large percentage returns on capital by buying an index fund during the long term secular bull market.It is not difficult to make money during such a period unless the investor wants to create problems for themselves by churning. The difficult environment is when the process has to become dynamic and complex, if the objective is to advance your capital position, with a lot of shifts out of and between carefully chosen asset classes.

During any long term cycle, other asset classes may present significant buying or selling opportunities. A recent example was the opportunity to buy investment grade corporate bonds starting in late 2008 and early 2009, at unusually large spreads to comparable treasuries, which was heightened in the niche market for Trust Certificates: Trust Certificate Links in One Post An asset class undergoing a parabolic move, such as oil on its way to $150 a barrel, would be an example of something that needs to be sold, irrespective of the classification of the long term trend.

Since I am currently 58 years old, and presently doing well in my second long term secular bear market of my life, I suspect that I will have just one more long term secular bull market where I can relax and coast, and unfortunately one more long term bear, which may be really nasty. In the next bear period, the asset classes which might be negatively correlated with stocks may be different than the ones which worked in the current long term bear. I would be surprised if treasury bonds held up during that period, possibly starting around 2027 to 2030 and lasting until a large number of baby boomers pass away.

2. Australian Dollar and the Carry Trade: In several posts I have discussed the role of the Australian dollar in the carry trade. An article in weekend WSJ discusses this issue an highlights how the unwinding of a carry trade can place downward pressure on the Australian currency. Basically, money is borrowed in low interest rate currencies, which historically would mean the Japanese Yen and currently includes the U.S. dollar, and invested in high interest rate currencies which would include the Australian dollar. The speculator would use extreme leverage, perhaps as much as 500 to 1, to increase the arbitrage between the two interest rates. When the carry trade involves the U.S. dollar as the funding source, with the money parked in Australian dollars, the unwinding of that trade requires selling the Australian dollar to buy U.S. dollars to pay back the loan, and this places downward pressure on the Australian dollar. US Dollar and the Carry Trade I mentioned this phenomenon in a post from October 2008: Weekend News 10/ 25-26/ 2008 Recognizing the implications, I had already sold my position in the Australian dollar, except for 30 shares of FXA, a currency position that had been bought and sold in 2008 as one of my more profitable trading strategies during that awful year. I recently sold that 30 shares of FXA at $91.62 based in part on a belief, more appropriately described as a hunch, that the same unwinding process was under way: Item # 6 /Australian Currency At some point, I want to buy FXA back, just not anytime soon.

Bought 50 DDT at 18.42/New Long-Short Strategy: Bought 50 SDS at 34.75 and 50 PIE at 14.04

Brian Westbury, Chief Economist at FirstTrust, keeps track of cash inflation, which is based on actual transactions, and excludes the make believe number of what the government estimates a homeowner would charge himself for rent. The cash inflation number is now up 3.4% over the past year. ftportfolios.com 2010/2/19/_cpi

1. Bought 50 DDT at $18.42 Friday (See Disclaimer): At a $18.42 price, this is a very marginal buy. DDT is a trust preferred issued by Dillard's Capital Trust I and guaranteed as provided in the prospectus by Dillard's (DDS), a department store chain. This is a typical TP. The underlying security in the Delaware Trust is a deferrable junior bond from Dillard's. Dillard's Capital Trust sells preferred trust shares to the public and uses the proceeds to buy the junior bond. The bond matures on 8/1/2038, so there is a lot of interest rate risk with such a long term bond. Rising Rates and Your Investments There is also significant credit risk. The security is rated CCC- by S & P according to the QuantumOnline.com site. So that is deep into junk which explains my timid purchase of just 50 shares. The TP's coupon is 7.5% with a a $25 par value. The yield at a total cost of $18.42 would be 10.18% paid quarterly. This is a link to the prospectus: www.sec.gov. Interest is deferrable for up to 5 years, which is typical for a junior bond, and any deferred payment accumulates with interest. There is a stopper provision activated by payment on a junior security. Dillards is currently paying a small dividend on its common stock. DDS Stock Quote - Dillard Department Stores Inc

Dillard's was profitable during the Q/E 10/09, earning 11 cents per share. www.sec.gov The current consensus is for 80 cents per share for its fiscal year ending in January 2010 and 74 cents for F/Y 2011. DDS: Analyst Estimates for Dillard's Inc.

I bought this security for the first time at $5.82 in March 2009. buy 50 of ddt I was not exactly comfortable buying it at that time, and maybe a tad more comfortable now. I do have a tendency to look down before gazing skyward.

2. Long-Double Short Strategy-Bought 50 PIE at $14.04 and 30 of SDS at 34.75 (see Disclaimer): After the big run up in stocks since March, and what I perceive to be a dicey future, I have decided to initiate new positions only with some kind of hedge bought at the same time. This will be an imperfect process at best. I am running multiple strategies at the same time, and this will just be one layered on top of everything else.

SDS is the double short ETF for the S & P 500. I will add shares in stages based on the movement in the VIX. The VIX crossed below 20 on Friday, and that was my signal to start the SDS hedge. More SDS will be added when and if the the VIX closes below 19, and more on a close below 18. This is a modification of the SDS swing trade previously used successfully after the commencement of the Unstable Vix Pattern in August 2007. Trading and Asset Allocation in Stable and Unstable VIX Pattern If the VIX shoots back over 25 again, then the first position taken will be sold and the remainder on a close above 28. And, if the VIX meanders below 20 for 30 consecutive trading days, I will sell the entire SDS position, which is being used as a hedge and not as a bet. Most likely, under those later circumstances, the transaction would be at a loss. And SDS and other double short ETFs will be entirely a partial hedge just for positions added so far in 2010 or to be added, and will not be anywhere near sufficient to hedge the large number of stock positions held at the start of 2010. If I do not implement this kind of hedging strategy now, I will not be able to increase my stock positions in the coming weeks.

I added 50 shares of PIE to my existing position. DWA Emerging Markets Technical Leaders is an ETF from Powershares. This is a link to its existing holdings: InvescoPowerShares.com - PIE - DWA Emerging Markets Technical Leaders Portfolio Holdings This ETF includes generally around 100 companies from emerging markets whose stocks are demonstrating relative strength and are not listed for trading on a U.S. stock exchange. And that last point means that larger well known companies are not included in this ETF. The NAV at Friday's close on 2/18/2010 was $14.17.

I bought 50 shares of PIE in October 2008 at $10.01: Emerging Markets

A way to play large cap names in the emerging market space is via another Powershares product called BLDRS Emerging Markets 50 ADR Index Fund - ADRE. That ETF has an expense ratio of .3% and contains 50 companies from emerging markets, owning their ADRs. This would cover the companies known by many individual investors: Holdings

A more comprehensive and low cost ETF is VWO from Vanguard: Vanguard - Vanguard Emerging Markets ETF Overview VWO has a .27% expense ratio and has 810 holdings currently: Vanguard - Fund Holdings

Lastly, I will also consider buying an ETF from WisdomTree: WisdomTree Emerging Markets Equity Income Fund (DEM) and from iShares MSCI Emerging Markets Index Fund (EEM):

The emerging markets have in recent years been highly positively correlated with U.S. stocks with a much higher beta. Seeking Alpha This paper written by William Corker has some historical correlation data: spwfe.fpanet.org:10005/.pdf ( and see instability & volatility in asset correlations & Emerging Market Currencies and Bonds as Non-Correlated Asset Classes).

CPI and the CPI Floaters OSM & PFK/Discount Rate Hike/Goodrich

1. Dividends and Interest: For those interested in Aegon and ING hybrids, the WSJ dividend page shows that regular quarterly dividends were declared by both firms on several that I own, including AEB, AEH, AEF, INZ, IGK, and IND. That information will remain at that web page until later today. Most likely before the end of this year, I will pare my holdings of ING hybrids by selling 100 of the 200 of IND.

In addition to those securities going ex dividend soon, I noted that the following securities owned by me also had dividend or interest declarations on that same page: KO (dividend increased from 41 to 44 cents; EMO (Entergy Mississippi First Mortgage bond); MI; METPRA (Met Life floating rate preferred); PZB (TC with Limited senior bond); STL; TRST; and OSM (Sallie Mae CPI floater).

OSM's March 2010 interest payment will be $.0736 per share. Now, I have to admit that I came up with a slightly different number for March when I did the calculation last December, which was $.079958. Item Number 3: CPI & CPI Floaters So either the OG made a math mistake or SLM did, and LB asked whether that was really a choice. This was my earlier calculation from that post:

November 2009 NSA CPI: 216.330

November 2008 NSA CPI: 212.425

Difference: +3.905

Divided by 212.425= .01838

Add the Spread (.02 for OSM; .024 for PFK)= .03838%

Multiply .03838% x par value of $25=$.9595 on an annualized basis

Divide by 12 months since the interest is paid monthly: $.079958 per share for March 2010

The prospectus says round to the nearest fifth decimal place. I did use the correct data points for the November 2008 and 2009 non-seasonally adjusted CPI. The LB checked the calculation, unfortunately at 6 a.m. this morning, and found that the prior calculation appears to be correct at $.079958, so I can not account for the difference of $.006. Headknocker instructed the LB to get the CEO of SLM on the phone, he wants to discuss this discrepancy.

2. CPI For January 2010: The CPI rose .2% in January after seasonal adjustment. Consumer Price Index Summary The index increased .3% without seasonal adjustment. Without seasonal adjustment, the CPI rose 2.6% over the last 12 months. Core inflation, which excludes food and energy, declined .1%.

The fact that SLM and I do not agree on the computation for March will not keep me from doing the calculation for May 2010. My calculation for April can be found at CPI.

The non-seasonally adjusted CPI number for January 2010, which is used in this calculation, can be at the St. Louis Federal Reserve site: research.stlouisfed.org/fred2/data/CPIAUCNS.

Calculation for OSM May 2010 Payment:

January 2010: 216.687

January 2009: 211.143

Difference=5.544

Divide by 211.143 & Round to 5th decimal=.02626

Add the .02 Spread for OSM (.024 for PFK)= .04626

Multiply by $25 par value= $1.1565 per year

Divide by 12 months= $.09638

3. FED Raises Discount Rate by 25 Basis Points to .75%: Bernanke signaled this rise last week when he mentioned that the Fed wanted to widen the spread between the benchmark federal funds rate and the discount rate. The Fed also made it clear that an increase in the discount rate, the one charged to banks for emergency loans, would not reflect a change in the Fed's monetary policy. FRB: Press Release--Federal Reserve approves modifications to the terms of its discount window lending programs--February 18, 2010 Still, many investors view this 25 basis point move in the discount rate as a symbolic pivot move to a change in monetary policy. NYT I would tend to agree that the move is a baby step in the direction of ending the abnormally low federal funds rate.

4. Goodrich (own Senior Bond only): I mentioned yesterday that I bought the TC DKF which has a long term senior bond issued by Goodrich as the underlying security. For many of the OGs out there, Goodrich might be associated with tires, as in Goodrich and Goodyear. GR is an aerospace firm: Reuters.com For 2009, the company reported net income of 597 million or $4.7 per share on sales of 6.686 billion. Exhibit 99.1 I do not recall the year, but the currently configured GR divested its tire business.