investmentcomment

Today’s Treasury Sale Signals National Mania (8/26/2010)

Today the Department of the Treasury sold 7 year notes for an interest rate of 1.99%. The 10 year note is now yielding 2.54%. The 30 year Treasury bond is now yielding 3.54%.

Let’s put this in context.

The average rate of inflation is 3%. These bonds appear to have priced in an inflation rate of 0%.

Average taxation is about 25%. If you have a tax rate of 25%, the real return to a 10 year note is 1.9%. For a 30 year bond, the real return is 2.66% after taxes.

So in terms of purchasing power, anyone who buys these outside of a pension plan will almost surely lose money.

The only way they will make any money at all…and that marginally…is if the economy of the United States simply fails. If we go nowhere for the next 10 years, these will be a reasonable investment, if interest rates don’t rise.

If interest rates rise, we may expect a 30 year Treasury note to lose up to 30% of its value. So these are, in fact, high risk investments at this time.

In all sincerity, in such a situation we are better off buying pistols. History tells us that a good 1911 .45 ACP by a well-known maker such as Colt or Springfield will retain its value in economic depressions and go up in value during times of inflation. These pistols should appreciate more than 3% a year. But is the world situation really that dire?

If you feel it really IS that dire, then a 1911 .45 ACP purchase is in order, since you will also be able to use such a pistol for barter or self-defense. If that’s where your head is at. Be sure to store it safely if you buy.

From another vantage point, the yield on the stock market now is about 2%. So we can buy a stock market index fund and get more YIELD than we can get on a 7 year Treasury note. Where do you think the stock market will be in seven years? Unless you subscribe to the end-of-days scenario, it will probably be higher than it is now.

Please think back to the happy heady days of 2007. House prices were going up multiple double digits each year. 20%. 30%. And we were informed by many experts that this would continue ad infinitum.

Now these same experts are telling us that we will go nowhere financially for the next 30 years.

I am not a fortune teller. These experts may be right. But in my living memory, and in the history which I study, at its extremes the consensus opinion is ALWAYS WRONG. I will be happy to change my opinion: just show me one time in history at a market high or a market bottom when the public mood was accurate.

Just show me ONE TIME!

If that is indeed the case, then it’s time to stay diversified and rebalance TOWARDS stocks. In real terms, based on the extreme negativity which surrounds us, the future looks bright to me.

It may take a few years. The path may be rocky, fearful, and uncertain. But history tells us that we will thrive again.

8/17/2010

Time to take the money and run!

Since we are unsure about where the economy is going, I decided this morning to take profits on two of our most successful and most risky mutual fund selections.

We purchased Vanguard REIT Index fund in the early months of 2009 when doom was in the air. Many of us have doubled our investment, or close to it. But the easy rebound seems to be behind us, and the beta risk of this fund has risen to 1.6 or more. So this morning we sold it and put the proceeds into Janus’ short-term bond fund.

Our selection of REMS Real Estate Value fund in early 2009 was driven by the same criteria: bargain prices in real estate stocks. We have since come close to doubling our initial investment in this fund. But since buying this fund, we’ve watched as overall real estate statistics have not improved. In other words, the wonderful price rise we’ve experienced in this fund is somewhat unsupported by reality. Meanwhile, the beta statistic for this fund has risen to over 1.3. So this morning we cashed in our holdings, and moved the money to a PIMCO short-duration mortgage fund.

We’ve moved to a position of relative safety, although both of the new bond funds could be bitten very slightly by a rapid upsurge in interest rates. My intent is to move your assets from these funds within 3 to 6 months, when we find another bargain. There’s always a bargain somewhere.

8/10/2010

Today the U.S. Treasury Department sold Treasury notes at an historically low interest rate, below 1%. This means that the buyers of these 3 year Treasuries are betting on a barely functional economy for the next three years with 0% inflation.

This is hysteria at work, if not more.

Yes, the economy is struggling. History tells us that it’s probably going to take at least five years, to 2015, before boom times truly reemerge. And when that happens, it will be time to take profits and get safe.

But history suggests that the economy will heal unevenly, and even unpleasantly, in fits and starts. It doesn’t suggest that we are going to live through a depression. This time could be a first, of course. But earnings suggest that a depression isn’t likely.

What is happening economically is not new. We’ve had recessions and even depressions throughout American history. Our ancestors lived through times much rougher than these.

Of course we can’t use the past to explicitly tell the future. Of course the past doesn’t exactly foretell what will happen next.

What history DOES tell us is that the national mood is a contrarian indicator. In other words, when people are pessimistic, it’s time to buy. When the national mood is upbeat, it’s time to be cautious.

I will delve into this topic in a bit more detail in a coming newsletter. In the meantime, it’s worth keeping in mind that based on historical indicators, we are hitting bottom. From a purely historical point of view, the national consensus is wrong.

8/6/2010

Today’s increase in the jobless rate should not surprise us. As I previously wrote, employment was artificially inflated earlier in the year by short-term hiring created by the census. As those jobs have expired, it is normal for the jobless rate to increase marginally.

In my opinion, the real jobless rate is probably much higher since many people have simply stopped looking for work and thus are uncounted in the jobless tally.

This week’s data also suggests that confusion over unfunded health care mandates and the general direction of taxes is causing the self-employed sector to sit back in confusion. The economic engine of small business continues to operate marginally.

All this is to be expected during a years-long economic recovery. It’s not easy out there right now.

Meanwhile, we are also seeing that the technology owned by the average American is aging and due for replacement. The pace of technological change itself remains strong, but consumers have been reluctant to buy as they have waited out the recent financial hard times. In the age of Facebook and on-line banking, this pent-up demand cannot be deferred forever.

This means that technology and capital, in other words everything from Apple to Caterpillar, are likely to out-earn standard blue chip stocks. With that in mind, I am tweaking our portfolios to ensure that every client who should have a position of relatively volatile tech stocks has at least a 5% exposure.

To get the money for this I am selling the last of our vastly successful Vanguard REIT fund. After booming for the past two years it now has a beta risk statistic of 1.65. This has become a very risky fund. Furthermore, it is very interest-rate-sensitive. Rates are currently close to their lowest levels in history.

So, while it has been very, very good to us, I am gradually selling our holdings of the Vanguard REIT fund and using the proceeds to buy a technology index fund.

7/13/2010 Waiting out the recovery

As we head into the core weeks of the summer season, I continue to see evidence that we are experiencing a slowdown within the context of a larger economic recovery.

Last Thursday the Federal Reserve informed the world that consumer credit dropped 1% in the past two months. In the long term, this is simply superb news. The citizens of the United States are engaging in energetic debt reduction.

Over the next few months, however, this is going to translate into reduced consumer spending which reduces earnings. So we can expect uneven growth at best for the rest of the summer, barring outside influences.

It’s interesting to note that people are in general avoiding adding to stock positions while cramming money into bond funds. We want to watch this: the next swelling bubble is appearing in the bond market.

My thought is that we aren’t going to see any train wrecks in the next few months, simply because the global economy isn’t strong enough to create the upwards interest rate pressure we would need to see bond prices drop. But it’s out there somewhere.

Meanwhile, the recovery will probably continue but very roughly, with plenty of bleak moments folded into our economic cake. I’m not seeing a double dip recession although it could happen if our social emotional miasma infects the investment community.

I’m still planning to ratchet risk up a bit in our moderate risk and market-risk accounts...if the markets give us the buying opportunities. But that hasn’t happened yet.

In other words, the best approach seems to be to wait it out and let our mutual funds work for us. We own good funds with some of the best managers. Letting them do their jobs is a prudent choice.

7/1/2010 Time to ratchet it up a bit

I am looking at the newest edition of Valueline numbers:

P/E: 16.2

Estimated yields: 2%

VLMAP: 65%

These indicators are telling us what recent numbers elsewhere and the yield curve are telling us: the current down market won’t last. We are looking at a buying opportunity. It is absolutely true that the technical indicators are telling us that we are entering a new down cycle in the stock market.

The M-3 statistic for money supply suggests a recession may loom ahead. But every other traditional indicator is telling us that if we DO enter a recession and a bear market, they won’t stick.

I am watching other investment advisors counseling to sell everything, which tells us that fear is in charge. The numbers haven’t failed us in the past, and now they are saying that such behavior is simply alarmist.

As of today, my intent is to ratchet risk UP through this quarter, and regard this as a buying opportunity. I intend to thoughtfully and carefully identify bargains in the mutual fund arena and buy them.

This will take the entire quarter, and if the market recovers before we can act, we will be no worse off. Rational and deliberate action seems appropriate.

I intend to sell a bit of what is high….bonds…and buy a bit of what is cheap…stocks.

A little is all we need, so don’t expect a lot of trading.

Buy low, sell high, it’s what we do.

6/25/2010 A Slow, Uneven Recovery

Yesterday’s bleak housing numbers evoke feelings of catastrophe, but that’s not what seems to be happening. Instead, what I’m seeing suggests that the economy is slowing down in the midst of a very slow and troubled recovery. There are too many variables for us to have a clear picture of what is happening.

History tells us that a slow healing process such as we are now experiencing economically contains within it a series of mini-cycles within the larger trend of growth. Economically, this is going to feel like two steps forward and one step back. Economic recovery is not an easy process. And the gulf oil spill isn’t helping the national mood, is it?

Here’s a June 10^th column which largely suggests the same: Read article

After a stimulus-driven bounce-back, the economy seems to be settling back like a soufflé just out of the oven, as government subsidies expire and markets have to make their own way. Recovery was never expected to be easy. It’s not.

The quick summary is that Andresen & Associates is going to continue to over-diversify to ensure survival if a double-dip recession DOES emerge. But we’re also getting ready to buy bargains later this year.

At the moment it feels like we will be stuck in this miasma forever. That is never the case. It may take time, but the next upturn is inevitable. Our job at the moment is to survive until that upturn happens, and be ready.

6/7/2010 Fear, fear, and more fear.

Friday’s jobless report is disappointing to many, but any job report, including Friday’s, is looking in the rear view mirror. Successful investors look a bit farther than what happened yesterday. What is likely to happen in two years? Three years? Five or ten years?

Corporate insiders are historically relatively accurate at determining what the share values of their corporations are likely to be in the future. The article below reveals what they are thinking.

Yes, they are bullish. I can’t predict what will happen tomorrow, or next month, but the historical odds are in favor of decent appreciation over the next decade, probably leaving bonds and cash in the dust. I have to agree with corporate insiders: for the long term investor, this is buying time.

We ask 19 year old Marines in Afghanistan and Iraq to face bullets. It seems reasonable to ask the average investor to think of something beyond yesterday.

Fear itself is a wealth destroyer. Let’s not go there. Read article

5/27/2010 M3 Contraction

This may mean something…or maybe not. Read article

Our take is that business abhors a sense of insecurity. With a rising sense of insecurity in the global financial arena, institutions are taking money out of bank-lendable accounts such as CD’s and buying bonds, gold, or other non-lendable “safer” assets.

At this time my take is that we’re diversified to the point that we’re going to lag a normal market. At this point my intent is to watch, and wait for an M3 induced downturn to hunt for bargains.

Meanwhile you’ve probably noticed we’ve been “weeding the garden.” Columbia Value & Restructuring is out, replaced by Appleseed. We are also almost out of the Swiss Helvetia fund. I’m writing a newsletter to explain the details. Meanwhile, DO NOT read too much into these money supply statistics. M3 can change on a dime.

5/21/2010 Let's Remember Why We Are Here.

This week’s destructive stock market action has generated its share of fear-sodden phone calls to our office. It’s certainly been a challenging five days. In reality, our average client is up .36% after yesterday’s debacle. The stock market (VFINX) was down -3.21%. The overall bond market was up 3.84%.

We’ve had several calls for insured certificates of deposit. CD’s ARE insured, and yielding about .7% for a one year investment, at best. In my opinion they aren’t worth it, at all.

We are coming out of one of the worst financial crises in a century and it’s unlikely that all the turbulence is behind us. We don’t even know if its over. We rebalanced after last year’s sterling gains, and did not chase the market until the downturn. Both actions are paying off now. As you can see, we’re doing just fine.

I will write a newsletter about this next week. Meanwhile, over the weekend, let’s try to enjoy and remember that we’re in a relatively good place. The long term plan is still entirely valid, and we will stay the course.

5/6/2010 We are ready for this.

Yesterday we watched as global markets plummeted in response to bad economic data and a mistaken trade order. At one point the S&P 500 was down over 8%, although that market recovered to negative 3.24% for the day. Clearly a great deal of emotion and uncertainty was on display yesterday.

Yet it shouldn’t be a surprise. We’ve been waiting for profit taking for awhile now. The fiscal meltdown in Greece is simply justification.

What this DOES NOT seem to be is a global descent into financial madness. I can’t see the numbers for that. What I CAN see is increasing evidence that genuine recovery from our global malaise will be years in the making. We’ll make money, but it won’t be easy or predictable.

We rebalanced towards safety in the first quarter, and we are remaining cautious now. Overall, Andresen & Associates accounts are up 3.29% versus 1.78% for the Vanguard Index 500. Being cautious and willing to lag has paid off so far this year.

My original plans for this quarter have been scrapped. It was previously my intention to simply watch our flock of mutual funds graze in the sunlight this quarter. Now, I’m looking for bargains.

4/26/2010 Looking Abroad.

This week we received more great economic news. For example, new home sales are up 27% from last year, which is a terrific indicator of continued economic recovery. We have good reasons for smiles this weekend.

We’ve begun a multi-week review of the international markets. As I wrote last week, it is becoming increasingly apparent that European countries such as Greece should probably not have participated in the Euro currency from the beginning because their economies were riddled with weakness and graft going in. Political empire builders forced the shotgun marriage of both weak and strong in Europe. Now we face a very uncertain future for the weaker nations in Europe, and especially for the Euro.

How ironic this is. As you may recall, a few years ago people were talking about the Euro as a replacement for the dollar as the global standard currency. Let’s not get arrogant; we have yet to prove that the US economy can provide the rising tide which raises all boats.

Meanwhile, we have to give thanks to the political curmudgeons of independent-minded countries such as Norway, Switzerland, and Great Britain. These dour, uncool politicians said “no” to the Euro in the late 1990’s, in the face of a great deal of international pressure. Now their conservatism is providing safe currencies for the investors of the world. Also commodity-rich nations such as Canada and Australia have witnessed gigantic rises in currency values as investors flock to currencies backed implicitly by hard assets.

Nobody could have predicted this, especially since some nations were obviously providing misleading data about their sovereign financial conditions.

Diversification pays. As far as the international sector is concerned, Andresen & Associates has been noticeably diversified and craven, with very good results. In the next few weeks we’ll be examining what to do next.

4/16/2010 Recovery? Who knows?

We got some good news yesterday. Tech companies are posting much higher profits for the past three months. To some degree this is due to inventory replacement, but it is still superb news. Even better is news that the tech sector is hiring again, thus reducing our national burden of unemployment.

A rebound in tech profitability is triple good news because these people MAKE something. Thus we are likely to see a rebounding effect throughout the economy.

Meanwhile, the Greek government bond scandal has revealed to us that a primary cause of this meltdown is….good old fashioned graft. As has been the case throughout history, economic boom times create a tolerance for immorality, and hard times create a demand for basic morality. It’s an endless cycle of humanity, and we are watching it play out yet again, this time on a much bigger scale.

Meanwhile, the stock market is continuing to rise, with the Dow Jones Industrial Average finally above 11,000 again. The data I am seeing is suggesting that the market is fully valued, and thus subject to profit-taking. That means we could see a correction.

I am NOT SEEING evidence of an imminent stock market crash. What seems likely is a seasonal short-term bout of profit-taking. Given this evidence, I am content to stay very diversified and to have our portfolios lag slightly. Of course we don’t really know what will happen, which is even greater justification for staying cautious. Long term, we will probably be glad we did so.