The Rush Report
The Q4 2009 Market Rush Review
By
Mark Rush
redgroup2@
January 3rd 2010
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Preface
Once again, it is once again time for my quarterly market review, where I examine world events and attempt to understand their implications on the market. This is my time to reflect on current events, portfolio performance, and event scenarios, and their subsequent implication on world equity markets and my investment strategies.
As you read through this review, even if you don’t agree with my thoughts or analysis, please take the time to think about your financial choices and ways to improve your returns. It is my goal in life to have my money working for me instead of me working for my money.
Please email me with your thoughts, questions, and insights on the opinions that I present. The purpose of my effort is to stimulate a dialogue around current events and their impact on the markets.
This document may be distributed to anyone free of charge as long as it is provided in an unaltered form. I reserve all Intellectual Property Rights of this document.
Regards,
Mark Rush
redgroup2@
Please read this important notice
Disclaimers
As you read this document keep in mind that I do not have any special insights into the markets nor do I have any type of training or experience in any kind of investments. I am not a financial advisor nor do I have a degree in economics or finance. Remember these facts as you read and ponder my unprofessional opinions.
This document should not be construed as investment advice; you and your financial advisor are responsible for making your investment decisions. The purpose if this document is for me to “think out loud” and stimulate thoughts regarding my investment ideas for my portfolio. I am asking you for your feedback about my thoughts, strategies and conclusions.
Nothing in this document should be construed as tax advice or estate planning. Tax laws are complicated and change often. I do not have the time to follow changes in tax codes; therefore, any thoughts I may have on the subject are very likely to be obsolete or, at the very least, dated. Before you attempt to implement any tax strategies you should consult a tax professional or financial advisor.
All thoughts and strategies are based on the fact that I invest money from the United States using US dollars and pay US taxes. All comments and views are from my American investment perspective. Many of my strategies consider US tax implications and currency exchange rates that may not be valid when viewed from outside the US.
The views and opinions in this report are strictly my own based on publicly available information. I do not have any special perspective into the markets. Opinions stated are my own and do not reflect the opinions from any current, past or future employer.
I will/may change my strategy and investment ideas radically and suddenly between reports without notice to any receivers of this report. My own investment strategies can be extremely aggressive and my portfolio should not be replicated by anyone, including me.
I am an amateur investor and this document is a hobby for me. Any thoughts and concepts should be treated as such. Please consult a professional financial advisor before you make any investment decisions regarding your investment ideas, goals, and strategies. Continue reading this document at your own risk…
This report is subject to considerable error and the opinions can change without notice. Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities or investments. Do NOT ever purchase any security or investment without doing your own and sufficient research. Past performance is not an indication of future results.
Introduction
Merry Christmas and happy 2010.
In case you didn’t notice, I failed to send out a report at the end of October. I chose not to finish the Q3 report due to time constrains related to my hiking trip across the Grand Canyon. Training for the trip consumed most of my free time and cut heavily into my “report time”. To be honest not much changed since the summer report and I didn’t have a lot of new material to add to the previous report. I did find time to calculate all the statistics and various market prices and the Q3 data will be incorporated into this report.
Now I have had a full 6 months of watching the economy and evaluating our world economy and our political “change” I have found some new thoughts share this time. Given that I am a fiscal conservative, libertarian, and strict constructionist should be sufficient information for you to judge some of my viewpoints on various subjects. In this report I will attempt to restrict my meanderings to only economics, taxes, and investing. One abundantly obvious statement is that a new plan will be needed in the upcoming years for those who want to save, invest, and retain their standard of living.
On the subject of the world economy, more or less I think the risk of further major economic retraction is unlikely. Therefore future reports will return to its roots and focus on finding good long term investments and tax strategies.
Another year has passed and here we are starting another decade of investment fun… I hope it be more rewarding than the last ten years.
Regards,
-Mark
Chapter 1
The Basics
Taxes
I tried to compile some of the major changes that are going to occur and some of the changes will influence investing this year but most changes in tax policies start in 2011. I didn’t spend too much time on the subject because I am sure you elected representatives will have much to retroactively add to this discussion by the end of the.
What I have included in this section is a few tax law tidbits that are current at this time! With so many new taxes being proposed, I may have to change the name of this report from Market Review to Tax Review. Please don’t attempt to use this report as tax advice, please help stimulate our economy buy seeking out a destitute tax professional in need of stimulus today.
2011 Income, Dividends, and Capital Gains Tax changes
2010 is the last year for the “Bush” tax cuts meaning that dividend, and long-term capital gains tax rates will remain relatively low: 15% for most investors this year. However, that favorable tax treatment is set to go away on January 1st 2011, meaning that most long-term capital gains would be taxed at 20% and dividends would again be treated as ordinary income including those making under $250k. Oh, income tax rates also go up on the same day for higher income people. Again this is subject to change…
|Tax rates Beginning on January 1, 2011 on Ordinary Income |
|2011+ Tax Rate |2010 Tax Rate |
|39.6% (+5.4 %?) |35% |
|36% |33% |
|31% |28% |
|28% |25% |
2010 Roth IRA conversion
As of January 1, 2010 the cap on the amount of income you are allowed to earn and be eligible to convert a traditional IRA or an eligible qualified plan to a Roth IRA will be eliminated. In addition, if you convert your IRA to a Roth IRA in 2010 you have the option to spread the income tax liability over two years.
The key benefit of converting to a Roth is that you'll pay taxes now in exchange for tax-free withdrawals in retirement, which seems like a pretty good trade-off given that taxes are widely expected to drift upward in the years ahead, just keep in mind that like any tax break Congress could change the rules and decide to tax Roth IRA withdrawals sometime in the future. (I know of no legislation pending at this time).
The Roth also makes sense from the standpoint of estate planning. Unlike traditional IRAs, the Roth doesn't require mandatory distributions, thereby allowing your assets to compound and increasing the amount you can pass to your spouse or heirs. Your heirs, in turn, will be able to receive tax-free distributions on those assets, and they'll also be able to accept distributions over an extended period, further stretching out the tax benefits and enabling those assets to compound on a tax-free basis.
What are the advantages of converting to a Roth IRA?
• Tax Free Growth
• Tax Free Distributions
• No Required Minimum Distributions during participant's life
• Ability to transfer greater wealth to heirs
• Ability to reduce estate tax liability
When does it make sense to convert to a Roth IRA?
• You expect to be in a high tax bracket through retirement
• Your estate is large enough that it is likely to be subject to estate taxes
• You are currently in a low income tax bracket
• Your IRA assets have declined in value but you believe they will recover
• You have enough Non-IRA money to pay the income taxes due on the conversion
• You have net operating loss carry forward or other deductions that can offset the tax
2011 Child Tax Credit
The credit of $1,000 per eligible child reverts to $500 after 2010. After 2010, none of the child tax credit will be refundable to taxpayers unless their earned income is more than $12,550.
Estate Tax in 2010 and beyond
The inheritance tax expired this year but goes back into effect in 2011? Yes, if you had that rich uncle that is on his last legs, this is the year you want them to… expire. Now before you run off and “encourage” your wealthy relatives to expire this year, just remember Congress is working on way to repeal the tax repeal.
If a wealthy person who dies on January 1, 2011, and left their heirs $10 million would really be leaving them $5.05 million because of taxes. If they died a day earlier (assuming no changes were made in tax laws), the heirs would receive the full $10 million. Ahhh, The vagaries of taxes…
Now-2016 Credit for Residential Energy-Efficient Property
The current tax credit for 30 percent of the cost of installing solar water heating equipment, photovoltaic or fuel cell equipment, geothermal heat pumps or wind turbines in your primary residence or a second home expires at the end of 2016.
How 2011 tax changes will affect you this year
Certainly taxes are going to go up by next year, even though you may think you are not affected, your portfolio will be.
Taxes fall into 4 basic tax categories for various types of investments; tax free such as municipal-bonds (0%); low taxes (15%) such as long term capital gains (held for over a year), qualified dividend income (also at 15%); and taxable income (up to 35%) such at REITs, bonds, and short-capital gains (held for less than a year), and other nonqualified dividends.
Beginning in 2011, the top income tax rate will most likely go to at least 39.6% and health care reform may push this up to 45% from the current rate of 35%. Qualified dividends are likely to go up from 15% tax to the tax payers top marginal rate (depending on income it could be as high as 45%). Long-term capital gains tax rates are scheduled to rise to 20% tax rate up from 15%. This is if you hold a security for more than a year and then sell it you will pay taxes at a 20% tax rate starting in 2011.
Category Example 2010 tax rate 2011 tax rate
Tax free: Municipal bonds 0% 0%
Qualified Dividends: Most dividend paying stocks 15% up to 45%
Long term Gains: Stocks held for > 1 year 15% 20%
Non Qualified Div: REITs up to 35% up to 45%
Short term Gains Stocks held for < 1 year up to 35% up to 45%
Income Government and Corp Bonds up to 35% up to 45%
Now you are thinking, well “So what if the tax rate are going to go up by nearly a third on those making over $250,000? My marginal tax is much lower than that and it isn’t going to change”. Well, here is the problem… That 1% of the population has more money invested in the market than the other 99%, therefore what affects them directly will affect you indirectly. The other bad news is the tax rate for qualified dividend income is scheduled to go up for everyone as well as long term capital gains.
Now here is how you will be affected by a tax changes on the super-rich, those people next year are likely to see their tax rates jump from 15% to as much as 45% on dividend paying stocks. These people are likely to sell those stocks prior to 2011 and move into municipal bonds, other tax-free instruments, or non-dividend paying stock to be held for over a year. Also, in the past few years there has been a lot of pressure for companies to pay dividends from shareholders since shareholders are taxed at a low rate, the pressure will likely reverse and well-off shareholders will lobby the companies to hold steady or lower dividends to avoid the double taxation (its taxed at the corporate level and taxed again once you receive the money). Just remember the CEO of the company will be in this situation and will have the largest voice on what happens to future dividends.
Bottom line is that more people will be seeking tax free and long term capital gains while avoiding things like bonds, REITs, and short term capital gains. So expect Muni’s to go up while seeing high yield dividend stocks and all other type of bonds to go down on a relative basis. I also expect non-dividend paying stocks to rise in price on a relative basis.
Chapter 2
Market Dynamics
(Predictions for 2010)
Economic Projections
It is time to review world events applying my “opinion” based on absolutely nothing other than my limited understanding of how the world works.
The purpose of this section is to highlight current risks in the market. I will attempt to quickly try to explain my thought process behind each rating.
US Economic Indicators (my view)
US Gross National Product (GDP) Growth > +2.0 % for 2010
My 2009 prediction was for the US GDP to decrease by 3% in 2009, it will be some time before we get the actual number but from the data but I think I got this one more or less right despite the experts calling for much smaller decrease last year at this time. I do expect to see stronger economic growth next year (how could it be worse?) and will estimate growth at 2.0% this year despite the experts coming it at nearly 3%.
On the bright side I believe the Chinese took positive steps to rebuild their economy by building infrastructure (instead of attempted stimulus via social programs) and lowering taxes across the board. These steps resulted in Chinese economy growing and estimated 8.2% in 2009 and over 8.6% this year. I find it ironic that in a “capitalist” country like the US we are mostly using socialism to attempt to revive our economy while at the same time the “communist” Chinese are thinking and acting more of a Regan in their approach to reviving their economy. We will see which approach will work better… oh wait, we already have.
I believe a major economic collapse has been averted. Investments with overseas exposure should be considered due to higher expected growth rates.
The economy seems to be stabilizing and likely to expand this year
Unemployment of falls to < 8.5% by the end of 2010
I predicted 10% last year while most economists last year were calling for 8% unemployment this time last year. The last unemployment report came in at 10.0% with a peak of 10.3%. The experts were woefully wrong!
Next year is going to be a tough call, but I am going to estimate that we will have unemployment at 8.5% by the end of next year according to my super secret propriety guessing method. I have having a hard time finding a consensus forecast for 2010. It ranges from 7-14%. Hopefully, for all of us, I am correct.
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I believe unemployment has peaked and we will start to reduce unemployment in the future but for now this indicator is a big negative… But almost everyone (including me) believes it will be years before we get back to “normal” unemployment rates.
Unemployment is very high
Federal Reserve holds rates steady or raises interest rates 2010
This wasn’t even a tough one to get right. You can’t lower interest rates lower than zero. I expect that we will keep rates low through 2010 although if I was the Fed chairman I would raise them to 0.5% immediately and consider 1% by the end of the year.
Current low short term rates are very inflationary and I feel that it was a necessary evil at last year. Longer term I expect these low rates will cause inflation, which is bad for the value of the US dollar. Hopefully the Fed will start being concerned about inflation the Fed will raise rates in late 2010. I find it odd that we created a crisis by having rates too low (near 1%) for too long and we are going to solve our problem by having rates at 0%.
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Low rates are good for the market…
Inflation > 3.0% in 2010
I was predicting 2% deflation in 2009 but thanks to massive printing of money I was completely wrong. The current inflation rate is around +1.8%. I believe the main reason that we haven’t seen massive deflation is due to the vast amount of money the Federal Reserve has printed. Below is a chart of the total money supply. This is how the Fed is fighting deflation, over the past 18 months FTTM has jumped from $4 trillion to $9 trillion. The only bright side is the growth of the money supply (green line, left scale) has slowed and seems to be stable. I will be happier (and so will the Chinese) when money supply starts to shrink (purple line goes below 0%, right scale).
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Currently we are not experiencing inflation or deflation and the vast increase money supply seems to have stabilized.
Return of spending by US consumer in 2010
Foreclosures will be higher than historical for the next 2-3 years; consumer spending will take years to recover since much of the spending was financed via fictitious housing values.
This indicator remains weak but stable
S&P profits grow by 20% in 2010
Corporations were financially stronger going into this down turn (except financial institutions) compared to other downturns but this one will be much deeper. Analyst’s expectations are near 30%, but they tend to be a bit over optimistic.
I expect S&P 500 earnings growth to be up 20% from 2009
Stable (- 5%) Real Estate prices in 2010
The 30 year mortgage rate is up to 5.3% from 4.8% in the last report. The current administration’s propensity to spend has begun to put pressure on long term interest rates and inflation expectations. When the Fed stops buying mortgage securities in March as planned rates could spike to 6% or higher sooner and faster than expected, slowing demand and pushing prices down. This more than anything may undermine the recovery and recreate the disaster that was averted. I want to get my house before this happens in March therefore I am still looking for a cabin in WV/VA.
30 Year Mortgage Rates
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Housing prices are stabilizing; interest rates are low
>$1,000,000,000,000.00 ($1 trillion Dollars) budget deficit for FY 2010
Here is another one that I missed last year, I projected a mere $1.0 trillion budget deficit last year but I was wrong and its came in at $1.42 trillion. The latest count it seems that we age going to see around a trillion dollar deficit again this year. In other words, the government is planning to deficit spend over $3,000 per person ( about $13,000 for a family of four) on top of the $8,000 per person ($32,000 for a family of four) that it actually collects. Wow, this year’s budget actually spends roughly the same amount ($45,000 for a family of four) as the median US household income ($50,000).
How much of my fair share of the $11,000 that will be spent on my behalf do I expect to receive this year? None, I will be mailing a check in the other direction well in excess of $11,000. I am what you would call in Washington deficit neutral or in the land of fairy tales, the golden goose.
This massive taxing, borrowing, and spending will eventually have a catastrophic impact on interest rates, inflation, value of the dollar, and standards of living for everyone. In 1944, Friedrich von Hayek wrote a book call “Road to Serfdom” eventually he received the Nobel Prize in economics in 1974. Everyone should read this book.
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I believe thoughtless government overspending is harmful in the long run
International value of the US dollar declining >35% in next 5 years
Long-term, I don’t believe the US can continue to support the current public and private debt burden. In the long term the dollar has no direction to go but down. The combination of poor education, poor fiscal discipline (public and private), and mass retirement only leads me to believe over the next 20 years it would be better to place a significant portion of your investments overseas to obtain better growth and to take advantage of the eventual currency devaluation and fall in local purchasing power.
Oil and Gold would theoretically increase by at least 35% over the next five years if my predictions hold true, but I expect those numbers to be far exceeded.
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Long term bad for US investing; Good for Foreign investments and commodities
Improved Liquidity in 2010
Liquidity became almost nonexistent for a few days in 2008 and the lack of liquidity could have caused a worldwide credit collapse… Thankfully I can report that this indicator has returned to an almost normal range and lets all hope that it stays there.
The below chart shows the TED (Treasury Euro-Dollar) spread. This shows the premium that banks must pay over Treasuries to get money. This is kind of like a fear index for the credit market.
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This indicator has improved significantly and near normal!
Technical Indicators
Technical analysis is the attempt to forecast the future direction of prices through the study of past market data. I tend to use Barchart ( ) to come up with a final “objective” opinion of an investment. I say objective since it a purely mathematical method to project a direction of an investment. Its primary ability (flaw) is that it tries to predict the future by interpolating from the past performance. One phrase does come to mind, “Past performance is not an indication of future results”.
This time I have added oil (USO) to the mix.
Model Portfolio and other technical indicators (+100% = strong buy; -100% = strong sell)
US Stock 7/1/09 10/2/09 1/3/09 Link
SPY +64% +8% +64%
QQQQ +72% +8% +96%
IWM +48% +8% +88%
Foreign Stocks
EFA +32% +8% +56%
EEM +48% +16% +80%
Bonds
TLT -16% +96% -88%
SHY +67% +96% -88%
Gold/Euro/Yen/US Dollar/Oil
GLD +32% +56% -8%
FXE +80% +16% -56%
FXY +32% +96% -64%
UUP -80% -32% +72%
USO N/A N/A +48%
Volatility
VIX -96% +56% -32% $vix&code=BSTK
These indicators seems to recommend the tech heavy NASDAQ index (QQQQ), the small cap index (IWM), and emerging markets. These indicators must be correct since they agree with my tax optimization thesis. Overall the indicators still prefer stocks over bonds and again I couldn’t agree with the results. It almost looks like other people are starting do what I am predicting in my report…
Oil is strong and this also agrees with my investment ideas. Bonds are also VERY weak and this once again validates my strategies. The technical bias in US Dollar (UPP) is a largest reversal in sediment in the US dollar that I have ever seen and disagrees with my long term demise of the dollar thesis. On top of that the indicators are indifferent on gold. Therefore I will exercise some caution in these two areas.
The CBOE Volatility Index (VIX)
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The Volatility index (VIX) can be thought of as the US stock market fear indicator and the lower it is the lower the fear in the market. This indicator is one of the more valuable tools to evaluate what implied risk is in the market at any given point in time. It was just at 29 in October and closed out the year around 22. This is a positive sign for stocks. If this index got above 30 again I would consider selling stocks again.
These technical indicators have are positive for all stocks, and for owning the US dollar. Foreign currencies are weak and all bonds are extremely negative.
Chapter 3
The Plan
Every trader reserves the right to make a more intelligent decision today than he made yesterday. - Sheldon Natenberg
Where do we go from here?
Economy
The economy is weak but stable and is likely to remain weak and stable through 2011, also it is important to note that at the end of this year the Bush tax cuts expire. Congress is considering a 5.4% tax on the upper income people to pay for healthcare reform (in addition to the 4.6% that already coming).
But with the US only being about 20% of the worlds economy I don’t expect our problems here in the US to affect the rest of the world much (I also expect Europe to muddle along also).
Stock market valuations
The stock market has made quite the comeback from last year but is more than likely slightly overvalued. I don’t think we will have clear intentions of where to put money until next year once all the policies are known and the market reacts to all the tax policies. I would be willing to buy if prices were to come off 10% or so, until then I have thinned out my portfolio and I have a mostly cash at this time. If you take the time to look at individual stocks you can still find some real bargains. Over the past few years I have focused more on ETF but now I think it is more of a stock picker’s game these days.
The Dollar and US Bonds (the next bubble to burst)
I can’t emphasize this enough… I will not buy nor shall I ever hold US Treasuries Bonds (except for TIPS). If anything I will short US Bonds (via TBT). Yields are far too low for the risk being taken, the flight to “quality” has artificially driven rates low (bond prices high) and they will fall when the recovery begins. The Federal Reserve will need to eventually raise rates and this will also cause bonds to fall. I fully expect that interest rates to go up (bonds fall when rates rise) this year. Add to this the vast debt that we are incurring and I can only come up with one conclusion; Government Bonds are likely to fall by 30-50% in value over the next 5 years.
Muni bonds
Taxes are going to go up and people are going to want to shelter income, tax free bonds are going to go up. I am thinking about buying some Muni bonds now and selling them when 2011 arrives. If you need tax free income this is one of your few options and it’s a nice place to keep short term funds in lieu of cash in the bank.
I have no intentions of keeping these instruments, I am just trying to make a quick buck (as long as you think a year is quick) by owning these before the entire heard moves to them. Once that begins, I suspect, a mini bubble will form in these things and that is when I will sell them. I believe that like all bonds they are a bad long term option.
It is possible for Muni bonds to raise as much as 20-30% by this time next year because of higher tax rates. If the US Bonds fall materially these could also be along for the ride so I plan to stick with short term instruments.
Corporate Bonds
Corporate bonds are likely to get beat up later this year due to taxes increases next year. I plan to avoid them until 2011 and then buy some in my IRA. Another factor to consider is if inflation starts to appear bonds do horribly during inflationary time and I suspect inflation will appear in the next couple of years.
Something one could consider is buy corporate bonds and selling (shorting) Treasuries. This would offer some protection from inflation and likely to yield a decent return under most circumstances.
Financial stocks
Too risky… Although I may be tempted by Goldman Sachs (GS)
Gold
Here is what I dislike about gold. I really do find it a funny item; it is extremely hard to find and our society spends a lot of effort finding, digging it out of the ground, and refining it. Then once we have some we tend to either burry it again in a bank vault underground somewhere (so others don’t find and extract it) or its turned into jewelry and fillings then eventually buried 6 ft under ground again. So to me it seems like we dig it out of the ground to eventually put it back into the ground somewhere else?
Holding gold also doesn’t produce any wealth, in fact, usually you have to pay someone to hold it for you (safety deposit box) or at least have some insurance to protect from theft. Most other investments are in some sort of economic activity and produce some sort of revenue, while gold just sits there collecting dust.
What I like about gold is that it is a reasonable store of value during times of inflation. Also most of the easy gold has been already been found already and as it has become more difficult to find and mine each year, in other words the supply is more or less fixed or decreasing. As third world countries become richer they tend to want to buy some of this silly metal also. Demand for this product will continue to increase as more people around the globe are able to afford more luxury items.
The more I look at gold the more I like it. I have only just started collecting gold coins and recently bought more gold and a few platinum coins. I believe that is wise for me to have at least 1% of my net worth in gold but not more than 5% under any circumstance.
The there ways to own gold is either buying gold coins directly or keep in a safe (I use Kitco - ) or to buy the Gold EFT (GLD) via the stock market. The third but harder way is to buy gold on the commodities exchanges.
One issue to consider is that gold, silver, and platinum fall under the heading of "collectibles" in the eyes of the Internal Revenue Service, making these metals similar to artworks, antiques, vintage wine, and baseball cards. This status means that profits from gold and silver investments do not qualify for the 15% long-term capital gains rates that pertain to stock and mutual fund investments and are instead taxed at 28% if held for more than one year. To the best of my knowledge this doesn’t seem to change next year.
It is my belief that gold over the long run will outstrip inflation due to stable to falling supplies and an increase in demand therefore I will continue to “collect” gold coins whenever I have a few extra unused dollars laying around over the next several years.
Oil/Energy
Oil has been remarkably resilient. The funny part is that investment has fallen in new fields and if the economy ever recovered then oil would double fairly easily from current prices. Oil was high due to impending demand of the world economy, drilling has fallen and are likely to have severe shortages of oil in the next 2-3 years.
Oil stock may be a good place to put a little money in this year. If the dollar weakens and/or inflation takes hold these stocks will outperform. I own shares of British Petroleum (BP) for its high yield and the Canadian oil company Suncor (SU) that harvests oil from tar sands.
To some degree I would shy away from US based oil companies since the “windfall profits tax” will likely be enacted the next time oil hits $150/bbl.
Domestic Stocks
I prefer stocks that have exposure to the emerging markets and don’t depend as much or Europe or the US. International tech companies seem to be a better play.
Chinese and Emerging markets
I am still a believer that these markets will drive the world economy over the next 50 years. I will be investing there based upon these beliefs. I am waiting for a major pullback to buy. This and energy is where most of my money will be invested for the foreseeable future.
Summary of Mark(et) Economic Indicators
GDP Growth – The economy seems to be stabilizing and likely to expand this year
Unemployment – Unemployment is very High
Federal Reserve Bias – Low rates are good for the market…
Inflation – Currently we are not experiencing inflation or deflation
Consumer Spending – This indicator remains weak but stable
Corporate profits Growth Rate – I expect S&P 500 earnings growth to be up 20%
Real Estate Market – Housing prices are stabilizing; interest rates are low
Budget Deficit – Disastrous
Dollar – Long term bad for US investing; Good for Foreign investments and commodities
Volatility Index – Down from highs, stabilizing
Technical Indicators – Strong for all stocks and US dollar, weak for everything else
Liquidity – This indicator has improved significantly and near normal!
One thing to point out is that it appears that I have some disagreement within my indicators regarding the US dollar. My analysis of the falling dollar is long term while the technical indicators are good for a few months under ideal situations. So, in essence I am predicting a short term rise in the dollar followed by a long painful decline or as like to say a “bear market rally” in the US dollar.
So… What is the Plan?
Over the past few years I biased my taxable portfolio toward high dividend since I have been willing to accept a 15% tax on the proceeds. I intentionally try NOT to shelter my taxable investments so that I could continually harvest value from my investments. But as the tax increases start to come closer I feel like this is a bad strategy. Since I am single and don’t own a home, I may not be as eager to pay taxes on my investments since the tax incentives are going to “change”. When the rates go up I will put much deliberation in how taxes may affect my investments and how to avoid creating any tax liability. This is the clearest example of the Laffer curve in action.
I also plan to thin out my high dividend stocks in my IRA by the end of the year. These stocks could take a short term hit toward the end of the year due to everyone else selling them to avoid taxes also. I would expect that if you were to have cash ready to invest within your IRA at the start of 2011 it would be a great time to buy these instruments. They be even more desirable (in the tax deferred world), assuming the dividend remains constant, these stocks should result in an even higher yield in, assuming my theories come to fruition. This is the year that I need to be very mindful of how the change in tax polices will lead to changes in the relative value of my portfolio.
This year also I plan to invest in low dividend stocks such as tech and growth stocks, oil, commodities, and emerging markets on any major pull back. Add to that a touch of gold and a speculative play on Municipal bonds while short the US long bond market (TBT)
I do not expect to become a committed investor this year but I will want wait until 2011 to see how the increase in taxes changes the market. I think late 2010 early 2011 will create investment opportunities.
To reduce my potential for higher income taxes I plan to buy a house and take out a 30 year fixed rate mortgage on a vacation home that I don’t plan to ever sell. I have also taken up the “hobby” of collecting gold and platinum coins from various parts of the world. I will continue to slowing collect a couple of coins a year for the foreseeable future.
I believe that were having real troubles keeping up with oil demand when the world economy was good, if the recovery starts up again oil is going to shoot up again. It is already over $75/bbl already without much of a recovery. Don’t get me started on green energy replacing oil, its not going to happen in your lifetime. New energy demand will always outstrip the ability to build sustainable projects. By the 2050 the world (even with all the green initiatives) will be consuming 50% more oil than it does today.
Longer term globalization has not and will not go away for the next 30 years. But the US has demonstrated its dependency on credit and if we add in the fact that we have a growing budget/dollar time bomb, it still brings me back to the same theme that I have had since the first issue of this report. With my long term view on global macroeconomics and my view of the US macroeconomics of the US debt markets, I have no choice but to invest outside of the US, minimizing my exposure to the US dollar and especially avoiding dollar denominated government bonds …
Chapter 4
Investments Ideas for 2010
Short term cash
Barclays Short-Term Municipal Bond ETF
Symbol SHM
Sector Municipal Bonds
Risk Low
Return Very Low
Time Horizon Short Term 1 -12 months
Technical Rating 0%
Tax implications Tax Free
Account(s) Taxable ONLY
I often use SHY as a short term location to earn some interest on my cash. This year I will instead of using SHY will be using Barclay’s Short-Term Muni Bond Fund (SHM). I expect that these types of instruments are going to get very popular once taxes go up. One note is that I expect all interest rates to rise (bonds will fall) due to our current fiscal issues so there is some general market risk associated with these. I ran the Barchart technicals on this one and it’s neutral at this time and the short term indicators are ugly. It currently has a 2.1% tax free yield.
Inflation protected US Bonds
iShares Lehman TIPS Bond
Symbol TIP
Sector Treasury Inflation Protected bond ETF
Risk Lower
Return Moderate
Complexity Simple
Time Horizon Unknown
Technical Rating -8%
Tax implications Consult tax advisor (normal)
Account(s) IRA; short term taxed
The investment seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury’s TIPS index This currently pay 3.4% and theoretically should index to inflation.
Reversed leveraged US Bond ETFs
UltraShort Lehman 20+ Trsy ProShares
Symbol TBT
Sector 2x leveraged short US long Bond EFT
Risk Speculative
Return moderate
Time Horizon Medium term
Technical Rating +96%
Tax implications Consult tax advisor
Account(s) IRA and Taxed
The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. This is what I will use when I decide that I want to short the long bond. This ETF moves opposite direction and twice as fast as the 20-30 year bonds.
This is one of my preferred investment ideas right now and the technical ratings agree.
Financials
Security Name Goldman Sacks
Symbol GS
Sector Investment Banking
Risk Moderate +
Return Moderate +
Time Horizon Long term (36 months +)
Technical Rating -8%
Tax implications low dividends
Account(s) Taxed
Why do I like Goldman Sacs? It survived and paid back the government. I plan to own some when the rating improves.
Oil stocks
Suncor
Symbol SU
Sector Canadian Oil sands producer
Risk Moderate
Return High
Time Horizon Long Term (36 months – 60 months)
Technical Rating +40%
Tax implications 1% dividend
Account(s) Taxable
This is a Canadian oil company that makes oil from oil sands through mining and in-situ technology and then upgrades it into refinery feedstock, diesel fuel, and by-products. It makes light sweet crude oil/diesel and light sour crude oil/bitumen.
British Petroleum
Symbol BP
Sector British Oil Giant
Risk Moderate
Return High
Time Horizon Long Term (36 months – 60 months)
Technical Rating +56%
Tax implications Dividend tax rate of 15% this year: marginal rate in 2011
Account(s) Taxable in 2010; IRA in 2011+
Ok, this is a tough one… This company is probably one of the more screwed up oil companies going, so why do I own so much of it… Its dirt cheap and it has a high dividend and I expect oil to be higher in 2 years… The current yield is 5.8%.
I expect that oil prices will outstrip the tax implication on this one so I am still will to hold it while oil is rising. After 2011 I would want to hold this in an IRA account.
British Petroleum Trust
Symbol BPT
Sector Oil Trust
Risk High
Return High+
Time Horizon Long Term (36 months – 60 months)
Technical Rating +56%
Tax implications Dividend tax rate of 15% does not apply to this instrument.
Dividends are taxed at your normal incremental tax rate.
Account(s) IRA only
Basically, with this trust you own some of the revenue stream from Prudhoe Bay oil fields in Alaska. They sell oil, take out some fixed expenses and give you the remaining money each quarter. Currently, the yield is about 8.4%, the yield could go much higher and/or the stock price will increase as oil goes up. Like most trusts, this trust does not pay corporate taxes; therefore, dividends are taxed at your normal marginal rate. Also, keep in mind that this is a declining asset since the oil produced in Alaska is falling each year, so this why the dividend is so high.
This is a very volatile instrument since the dividend is directly based on the price of oil, which we all know is very choppy. If oil prices fall the value of this trust will fall faster.
This is another exception to my investment thesis regarding dividends since expect that oil prices will outstrip the tax implication on this investment. This would be a good stock in an IRA account.
Precision Drilling Trust
Symbol PDS
Sector Oil and Natural Gas Drilling Trust (Canada)
Risk High
Return Very High
Time Horizon Long Term (36 months – 60 months)
Technicals Rating +88%
Tax implications Dividend tax rate of 15% does not apply to this instrument.
Dividends are taxed at your normal incremental tax rate.
Account(s) IRA only
Same type of deal here except that you are dealing with a Canadian Trust. This company owns 240 drilling rigs and deploys them around the US and Canada. They make money, pay expenses and distribute the remaining cash. They were paying about 10% a year but have reduced their dividends to conserve cash; once they start again I would expect a 10% dividend and a rocketing stock price.
Knightsbridge Tanker
Symbol VLCCF
Sector Oil Shipping
Risk High
Return High
Time Horizon Long Term (36 months – 60 months)
Technical Rating +40%
Tax implications Dividend tax rate of 15% does not apply to this instrument.
Dividends are taxed at your normal incremental tax rate.
Account(s) IRA only
This company allows you to effectively be paid out from its profits from shipping oil around the world. It collects the money, pays expenses, and distributes the remaining money to its shareholders. This stock is volatile in the short run since the “value” moves significantly based on the daily shipping rate and the price of crude. This yields 7.5 % for now. This company is a “foreign” entity that has some particular tricky tax rules associated with it (which isn’t worth dealing with), so I only will buy it in tax deferred account (IRA Rollover)
Technology
Nasdaq 100 ETF
Symbol QQQQ
Sector Various tech firms
Risk Moderate
Return Moderate +
Time Horizon Long Term (36 months – 60 months)
Technical Rating +96%
Tax implications Low dividend
Account(s) Taxable
Of all the tech names I like Microsoft, Intel, Cisco, Google, and Apple… Most are contained in this one simple ETF. This is the easy way to invest in tech.
Corning
Symbol CLW
Sector Manufacturing
Risk Moderate
Return Moderate +
Time Horizon Long Term (36 months – 60 months)
Technical Rating +32%
Tax implications Low dividend
Account(s) Taxable
Corning manufactures specialty glass and ceramics products worldwide.. The Display Technologies segment manufactures glass substrates for active matrix liquid crystal displays (LCDs) that are used primarily in notebook computers, flat panel desktop monitors, and LCD televisions. I think that this business should boom after the recovery.
Precious Metals
Gold
Symbol GLD
Sector Precious Metal
Risk Moderate
Return Moderate +
Time Horizon Medium term (3 months – 60 months)
Technical rating -8%
Tax implications Long term capital gain rate of 15% does not apply to this ETF.
Long term capital gains rate for this security is 28%
Account(s) IRA; short term taxed
What this ETF does is allows you to buy gold as if were a stock. Each share that you hold is equivalent to owning a 1/10th of an ounce of gold. The gold is stored in a bank vault in Great Britain. Gold has always been a currency of safety and I believe world demand for this metal is only going to go up as the world gets richer. Also as the US dollar falls gold will tend to go up. I believe that gold will be $1500 per ounce within the next few years.
Platinum Index ETN
Symbol PGM
Sector Precious Metal
Risk Moderate
Return Moderate +
Time Horizon Medium term (3 months – 60 months)
Technical rating +32%
Tax implications Long term capital gain rate of 15% does not apply to this ETF.
Long term capital gains rate for this security is 28%
Account(s) IRA; short term taxed
What this ETF does is allows you to buy platinum as if were a stock. The deference in this vs. gold is this in a financial product while the gold EFF gives you rights to physical gold in a vault in London. They are working on a physical ETF for Platinum. I believe that platinum will be over $2000 per ounce within the next few years. At this time the technical indicators are better for platinum than gold.
Chapter 5
International ETFs for 2010
2010 Consensuses Economic Growth Forecast by Country
|China |8.6% |Chile |3.5% |United States |
|US Large Cap: |20% |30% |40% |30% |
|US Small Cap: |10% |10% |20% |30% |
|International: |10% |20% |30% |40% |
|Fixed Income: |50% |35% |10% |0% |
|Cash: |10% |5% |0% |0% |
US Large Cap:
SPDR S&P Depository Receipts (SPY) 33%
NASDAQ 100 Trust Shares (QQQQ) 33%
Vanguard Value VIPERs (VTV) 33%
US Small Cap:
iShares Russell 2000 Index (IWM) 100%
International:
iShares MSCI “EAFA” Europe, Australia and Far East Index Fund (EFA) 50%
iShares MSCI Emerging Markets Index (EEM) 50%
Fixed Income (Bonds):
iShares Lehman 20+ Year Treasury Bond (TLT) 25%
iShares Lehman 7-10 Year Treasury Bond (IEF) 25%
iShares Lehman Aggregate Bond (AGG) 25%
iShares GS $ InvesTop Corp Bond (LQD) 25%
Cash:
iShares Lehman 1-3 Year Treasury bond (SHY) 100%
Year to Date Returns
|Name | |12/31/08 Price |12/31/09 Price |YTD Gain % |YTD Gain % w/ |
| |Symbol | | |w/o Div |Div |
|SPDR S&P Depository Receipts |SPY |$90.24 |$91.95 |23.49% |25.91% |
|NASDAQ 100 Trust Shares |QQQQ |$29.74 |$36.38 |53.83% |54.55% |
|DIAMONDS Trust |DIA |$87.52 |$84.66 |18.91% |21.70% |
|Vanguard Value VIPERs |VTV |$41.16 |$39.55 |16.01% |18.65% |
|iShares Russell 2000 Index |IWM |$49.24 |$48.10 |26.81% |28.27% |
|iShares MSCI “EAFA” |EFA |$44.86 |$45.81 |23.23% |26.44% |
|iShares MSCI Emerging Markets |EEM |$24.97 |$32.23 |66.20% |68.53% |
|iShares Lehman 20+ Year Treasury |TLT |$119.35 |$94.57 |-24.68% |-22.16% |
|iShares Lehman 7-10 Year Treasury |IEF |$98.53 |$90.67 |-10.08% |-7.04% |
|iShares Lehman Aggregate Bond |AGG |$104.20 |$102.15 |-0.97% |2.24% |
|iShares GS $ InvesTop Corp |LQD |$101.65 |$100.28 |2.46% |7.08% |
|iShares Lehman 1-3 Year Treasury |SHY |$84.66 |$83.71 |-2.01% |0.09% |
Results for the various “autopilot” portfolios
| |Risk |Balanced |Growth |Aggressive |
| |Adverse | | | |
|’09 Return |11.14% |19.65% |31.48% |36.54% |
|’08 Return |-8.18% |-18.66% |-33.90% |-39.60% |
|’07 Return |7.82% |9.40% |10.04% |10.45% |
|’06 Return |9.72% |13.63% |19.09% |21.83% |
|’05 Return |5.49% |7.55% |9.73% |11.77% |
|Total return since 2005 |27.35% |30.12% |24.97% |24.03% |
Those who stayed the course through the crisis would have made most of their money back, if not all it they would have replicated this portfolio. It’s clear that bonds are underperforming and the NASDAQ and the emerging market funds outperformed. What I find odd is that starting in ’05 all four portfolios have, more or less, the same return of about 5% a year.
Chapter 7
Final Thoughts
The Good
Interest rates are low and credit has become more available
The risk of financial collapse has been nearly eliminated
China’s economy seems robust
Credit spreads and volatility indexes (fear indexes) are near normal
Economic stabilization has occurred around the world
World GDP is projected to be positive in 2010
The Bad
High US unemployment
Governments interfering/controlling free market
Congress is full of economic idiots who think they legislate human behavior
Higher taxes in 2011 on capital/production
Oil is moving up faster than expected
The government has grown substantially and no end point is in sight
Iran’s nuclear program and Israel’s 238 thermonuclear weapons
The Ugly
Exploding budget deficit/national debt due to increased spending
We may be seeing the beginnings of a US Government debt spiral
Looming long term collapse of the US dollar
Potential for US bonds may be downgraded
Final thoughts:
I reluctantly condoned of the action that the Federal Reserve has taken with monetary policy since these actions has probably saved the credit market from a total collapse, although it has/is gambling with the credit rating of the United States. I do not approve of the new spending plans or the expansion off social programs of the current administration or other economic foolishness of “our” legislators.
I hate all bonds especially US Bonds! I will be short bonds by buying the double reverse bond ETF TLT. It is my investment pick of the year.
The things for me to invest in now is oil and non-dividend paying tech stocks. The world will have very tight supplies one the economy starts to recover and most likely be over $100/bbl by the end of 2010. The main driver of this is that India’s and China’s economies are still growing and consuming more and more oil. Oil may be a tad overpriced at the moment. If oil drops to $65/bbl I will move significant amounts of capital to this space.
I like tech stocks because they are a good way to shelter income since most have low to no dividends. When I need money I can sell them and only pay 20% in gains beginning in 2011 if I hold them for more than a year.
When everyone was borrowing I was saving and now that everyone is savings it is time for me borrow. I am still looking for a weekend cabin in Northern Virginia/West Virginia since I still unable to commit myself to Baltimore for the long term. This not so much of me being in love with real estate but has much more to do with tax avoidance and a back door method of taking advantage of potentially higher interest rates and future inflation.
I like gold and don’t like the US dollar but my technical indicator has warned that this may not be the correct time to buy gold or to move money into foreign currencies. I still think I will be eventually correct but will avoid any more commitment of resources in this area until those indicators are in line with my long term strategy.
This is the conclusion of my report, I hope to get the next report out by April 4th 2010 and entertain you with my new thoughts and reflections. Please send any questions, comments or topic ideas for future issues to me via email. GOOD LUCK!!!
Regards,
Mark Rush
redgroup2@
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