The Rush Report
The Q2 2009 Market Rush Review
By
Mark Rush
redgroup2@
July 12th 2009
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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.
Introduction
The theme of the last report was that we were at the “crossroads” and some of the early signs are that things are not getting worst and the world economy seems to be stabilizing if not showing slight signs of improvement. The economy didn’t get as bad as I feared and I am more confident that a total economic collapse or new “great depression” will not occur. The economy is far more resilient than I gave it credit for and human nature is far more resilient and optimistic than I thought. The multitrillion dollar question is this merely a pause in the collapse or is it the beginning of the end of the crisis? I am sure many asked the same question of themselves in 1930.
Just like in the late 1990’s when society over invested in the dot com bubble; at the end of the day we did get something for all the dot com bubble that we created. We developed new business models, wired the planet with broadband and made our economy more efficient via the internet. I would argue that we also sparked some new long term dividends with this latest bubble that we created. We sparked a new level globalization, international trade and advanced credit, capital and risk management structures albeit these benefits are much more esoteric but still very beneficial to the efficiency of the capital markets. Just as we live with the benefits of the internet boom today the globalization and capital efficiency benefits will continue on long after the current crisis becomes a distant memory. Did we get ahead of ourselves? Yes, and we are paying that price now but tomorrow should bring many brighter days ahead.
Do I think that we are posed for a sudden and rapid recovery? Absolutely not, but I will be buying more stocks on major pull backs. I believe the recent lows of the Dow Jones Industrial Average will not be repeated and intend to put my remaining life savings to work if the market were to approach those “cheap” levels again assuming we are without another major world crisis.
Regards,
-Mark
Chapter 1
The Basics
So many ETF’s, so little time…
With so many Exchange Traded Funds out there how in the world do I find the right one? I put together a short list of some links that have some of the info for you to use to find a useful fund. The Mark’s Model index funds are the 12 funds that you should look at first (Chapter 5).
This is a list by yahoo of the top 20 most active ETF over the past three months. and this lists all funds
Stock encyclopedia has a nice layout that I use to find what I need.
iShares have a lot of specialized ETF and this is a useful webpage
For those who like leverage or short this web page is good. It lists all the ProShares ETFs and they are categorized by short, ultra-short, and Ultra-long funds. This is a good starting point for your leveraged funds.
Note: Ultra funds tend to return twice the index so if it’s an ultra short fund as the index goes up this ETF will fall twice as fast. An Ultra fund will tend to go up twice as fast as the index. These ETFs are twice as risky and can be twice as rewarding.
My thumb rule before I invest in an ETF is that it trades at least 500,000 shares in any given day and has at least $250 million in assets. This gives me a certain amount of confidence in long term liquidity.
If anyone has a better webpage or search tool I would be interested in receiving it.
Chapter 2
Market Dynamics
Economic Projections
It is time to review world events applying my “opinion” to the probability of the event occurring (0-100%) with my “opinion” of the market impact on a scale from 1 to 10. A “1” represents little to no impact on the markets; whereas, a “10” indicates that if the event occurs, I expect a widespread fundamental market directional change to occur. This is totally unscientific, based on my irrelevant opinions with absolutely no other basis 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) Shrinks > 3% for 2009
Probability of Occurrence 50%
Impact 7
First Quarter US GDP shrank by 5.5% although this is large decline in net output I expect the contraction to ease by the end of the year and will stick to my -3% prediction from the end of last year. The economy has contracted hard but seems to be stabilizing, do not confuse this with recovering. The housing wealth effect has been eliminated and will dampen future wealth for many Americans for the foreseeable future.
On the bright side I believe the Chinese are taking positive steps to rebuild their economy by building infrastructure (instead of attempted stimulus via social programs) and lowering taxes across the board. I find it ironic that in a capitalist country like the US we are mostly using a socialist approach to attempt to revive our economy while at the same time the “communist” Chinese are taking more of a Regan approach to reviving their economy by lower taxes. Historically economic realism has always outperformed socioeconomic idealism, the Chinese economy will recover faster because of this and therefore a significant portion of my money is invested in that country.
I believe the economy will continue to contract but a major economic collapse has been averted.
The economy seems to be stabilizing
Unemployment of peak >10% by the end of 2009
Probability of Occurrence 50%
Impact 7
We are currently at 9.5% while most economists last year were calling for 8-9% peak unemployment this year. I am sticking with 10% based on my estimates but I don’t think we will go much past 10% (hopefully).
If employment stays here or improves (back under 8% unemployment), I believe this will be the sign that the economic is improving.
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I believe unemployment will peak soon at recent historical levels and we will start to reduce unemployment in the future but for now this indicator is a big negative…
Unemployment is high and is continuing to trend higher
Federal Reserve raises interest rates 2009
Probability of Occurrence 90% for ‘09
Impact 6
Since the Fed funds rate is near zero… My prediction of rate going up from zero is quite aggressive. Current low short term rates are very inflationary but I feel that it a necessary evil at this point. 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 at the end of next year therefore the Fed will raise rates in late 2009 or 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 cure our problem by having rates at 0%.
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Low rates are good for the market…
Inflation < -2% in 2009
Probability of Occurrence 50%
Impact 7
I have been expecting severe deflation but so far I have been wrong. The current inflation rate is around -1.3%. 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, in the past 9 months FTTM has jumped from $4 Trillion to $8 Trillion. The only bright side is the growth of the money supply has slowed and seems to be stable (green line). I will be happier (and so will the Chinese) when money supply starts to shrink.
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Currently we are not experiencing inflation or deflation but the vast increase money supply is worrisome
Return of spending by US consumer in 2009
Probability of Occurrence 10%
Impact 7
Clearly the housing ATM machine is broken and many people lost their house so they could fill it with more junk. Foreclosures will be higher than historical for the next 2-5 years; consumer spending will take years to recover since much of the spending was financed via fictitious housing values.
This indicator is very weak but may be stabilizing
S&P profits exceed of $40/share in 2009
Probability of Occurrence 50%
Impact 6
Corporations were financially stronger going into this down turn (except financial institutions) compared to other downturns but this one will be much deeper.
I expect S&P 500 earnings growth to be down by more 33% form last year
Real Estate prices drop greater than 10% in 2009
Probability of Occurrence 50%
Impact 3
The 30 year mortgage rate is up to 5.4% 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. This more than anything may undermine the recovery and recreate the disaster that was averted.
Currently, I don’t own a house and but I have started to look for a weekend cabin in northern Virginia/West Virginia and I expect to buy a place within the next 9 months.
The attractiveness for me owning a house isn’t the because of the house but it is the acquisition of the loan. I want to borrow money now and have never “wanted” to borrow money before in my life. I am going to borrow within my means, make a 20% down payment and keep some money free to make payments if I loose my job. I want to own physical things (houses) and I want to owe paper (dollars).
In other words I believe that if you were to take out a mortgage now that your total effective payments may never be lower due to the combination of low prices, low interest rates and rising taxes. Does this mean I would want to invest in real estate? Are you kidding…? No! But if I wanted to own some property for the long run (not as an investment) this year and next year wouldn’t be the worst time to buy. I believe that next year that housing prices will fall more but I believe interest rates will be higher so total payments may go up…
As far as owning a primary residence, I would like to buy a primary home but I still am unable to commit to living in Baltimore for the long term. I have no immediate plans to purchase a house in the city. We will have to see how the future shakes out before I commit to owning a “real” home in Baltimore.
30 Year Mortgage Rates
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Housing prices are falling; interest rates are low but may be rising
$2,000,000,000,000.00 (Trillion Dollars) budget deficit for FY 2009
(Sadly raised from 1,000,000,000,000.00 from the Q4 ’08 report)
Probability of Occurrence 70%
Impact 4 short term: 9 long term
The rich are getting are not as rich as they were and many won’t be paying taxes that they once were while spending has skyrocketed. This has no other solution but to borrow and print massive amounts of money and that will not be good for the dollar in the long run.
Government should pay down its debts and fix infrastructure when times are good and borrow when times are bad. Someday we will hit a point of “we can’t afford to do this” only when it is too late. I would rather send money out to the population in the form of checks to allow them to buy the things that are needed, not in the form of political patronage.
The CBO is now estimating $1.8 Trillion; does anyone want to bet a beer that we exceed $2.0 Trillion per my prediction last year? Thank goodness our government is only going to borrow $1.4 Trillion next year. This massive borrowing will have an impact on interest rates and inflation.
[pic]I believe thoughtless government overspending is harmful in the long run
International value of the US dollar declining >20% in next 5 years
Probability of Occurrence 75%
Impact 7
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.
From the chart below you can see before the crisis that the dollar was falling and once the crisis come to fruition the dollar rose. The dollar should eventually fall 10-20% to get back to the old values/trend. Oil and Gold would theoretically increase by 10-20% under these conditions
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Long term bad for US investing; Good for Foreign investments and commodities
Improved Liquidity in 2009
Probability of Occurrence 75%
Impact 7
Liquidity became almost nonexistent for last year and the lack of liquidity could have caused a worldwide credit collapse… This indicator has returned to an acceptable 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 is approaching normal!
Technical Indicators
Current values N/A
Impact N/A
Model Portfolio and other technical indicators (+100% strong buy -100% strong sell)
US Stock 12/31/08 4/3/09 7/1/09
SPY 0% 32% +64%
QQQQ -24% 96% +72%
IWM 0% 40% +48%
Foreign Stocks
EFA 32% 40% +32%
EEM 0% 80% +48%
Bonds
TLT 72% -48% -16%
SHY +16% -40% +67%
Gold/Euro/Yen/US Dollar
GLD +80% -48% +32%
FXE +32% +64% +80%
FXY +56% -96% +32%
UUP -32% -48% -80%
Volatility
VIX -64% -80% -96%
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The Volatility index (VIX) is kind of like a stock market fear index notice that it spiked after 9/11 and during the start of the Iraq war. It was just under 45 in the last report and closed out the year around and closed last quarter at 29. This is a positive sign for preserved risk but the jump up in the past few days is causing me to get nervous again.
Bottom line is that these indicators are positive for risk taking but a clear warning signal if it breaks through 35 again.
These indicators have are positive for all stocks, positive for gold, Euro and Yen; negative for Dollar and Government bond... These indictors recommend investing but not in US dollars or Bonds.
Chapter 3
The Plan
Fiscal responsibility rant
We still have two very large forces at work, here the implosion of the economy causing deflation and central bank printing presses causing inflation. The outcome is uncertain and anyone who believes otherwise is foolish, but my guess is that we will come down on the side of inflation but that day may still be one to two years away.
On the positive side the economy isn’t falling off a cliff and mass bankruptcies of large corporations aren’t occurring (except in Autos). I believe the economy will not contract much more and the world economy will start to grow in 2010.
On the negative side we still have substantial risks in the economy, what worries me it the prospect of thousands of little companies that aren’t “too big to fail” may go under. After all, small business provide most of the jobs in the US and who is watching the little guy and offering loan guarantees if things go bad. Also overseas a vigilant eye is needed to watch over the UK, Ireland, Italy, and several Eastern European countries. Some of these countries are teetering and if the “experts” were concerned about AIG failing what would they think if the UK went Bankrupt?
What was needed to be done has been done and we are now at the point that we need to sit back and let things mend themselves. In my opinion, the members of the US Congress are hapless economic buffoons and unlikely to be able to handle their own personal finances let alone a multitrillion dollar economy. It’s like taking someone who has never seen an airplane before and making them chief designer at Boeing. The government needs to stop helping the economy because it is not helping anymore…
I would expect any further stimulus, program expansion, or additional taxes to be counterproductive (read this as tax or spend). The current stimulus already drove up mortgage rate up by .5% and I fear more stimulus could cause huge rate increase thereby causing a total collapse of real estate. The crisis was caused by real estate, low rates will effect a recovery, huge programs causes the government to borrow more driving rates higher, higher rates will cause lower real estate prices, therefore the propensity of the government will to be stimulate more by borrowing more driving rates even higher.
Building new shinny schools is nice when you can afford it but the many of the people that will be competing for the jobs of the future are attending classes on dirt floors using 40 year old text books while achieving significantly higher results. Our students would be much better focusing on results and not incurring the debt burden that their parents imposed on them because their parents wanted to live in a house they could not afford.
Every trader reserves the right to make a more intelligent decision today than he made yesterday.
- Sheldon Natenberg
Where do we go from here?
Possible economic outcomes…
Quick recover
Quick and mild recession
Deep and long recession
Depression with deflation
High inflation
Hyperinflation
Monetary system collapse
“X”
Based on my own limited understanding of the world I personally believe without any justification whatsoever that the probability of each scenario is as such.
12/31/08 4/3/09 7/11/09
Quick recovery 10% 5% 5%
Recession 20% 30% 20%
Long Recession 30% 30% 35%
Depression 10% 5% 5%
High inflation 15% 15% 25%
Hyperinflation 5% 5% 5%
Collapse 2.5% 1% 1%
X 7.5% 9% 5%
As you can see I seem to be eliminating any chances of a quick recover but on a brighter note I am reducing my expectations of a doom and gloom outcome for the economy.
Economy
The economy is weak and is likely to remain weak through 2010, at the end of 2010 the Bush tax cuts expire and a large tax increase will be levied on the productive aspects of our economy staring in 2011. Also Congress is considering a 3% tax on the rich to pay for healthcare reform (in addition to the 4% already coming). Also the minimum wage goes up this month to $7.25/hr.
Currently a carbon tax is being proposed and implemented in 2012 that will tax everyone. So about the time the economy should recover we will tax significantly increase taxes on capital and production then the following year we will have a universally tax on consumption. It will take about 3 years to digest those tax increases so I don’t expect the US economy to return to normal (3% GDP growth) until 2013. I expect China will achieve 9+% GDP growth in 2011.
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 them (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 tax revenues will fall greatly this year. Add to this the looming Social Security issue and likely inflation. Government Bonds are likely to fall by 30-50% over the next 5 years.
Muni bonds
Fundamentally, the housing market has given many cities, counties, states artificially high revenue streams due to property taxes and yet they felt the need to borrow more money backed by those heightened revenue streams. Well, as the housing market collapses and property taxes recede, many of these municipalities are or going to have trouble paying the interest on those bonds let alone returning the principle to their rightful owners.
But what do I think of bonds as an investment? What is abundantly clear is that the US Government isn’t going to let anyone fail, especially any state or local government. In fact I believe they may even encourage these entities to “simulate” the economy (this is merely a political code word for tax and spend without the tax part). I think that Muni bonds are safe as long as Treasuries are safe. If a true dollar crisis were to develop this issue would become disastrous. As a Capitalist, I hate these instruments; as a reluctant Keynesian, how could you not love them?
The question isn’t will or will they not pay the loans back; the question is who will pay the loans back? If you don’t believe the previous section on US Bonds then this is the place to go… If you do then these are a time bomb. If the Federal government steps as I expect these bonds would be safe and have higher yields and better tax advantages than treasuries.
Corporate Bonds/convertible bonds/preferred shares
As I have stated in previous sections I don’t like US Bonds because I believe they are too expensive and the yield is too low. What I do like is highly rated corporate bonds especially the ones being back by the government. The yields on these bonds beat US bonds and in terms of risk adjusted yields are high.
I have also bought some funds that deal with convertible and preferred share. These are great little instruments that have high yields and substantially less risk than common shares. When inflation starts to appear, I would sell all these instruments quickly for bonds do horribly during inflationary time. 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… they have run up significantly from the lows and have sold some that I foolishly kept.
Gold
This is another tough one that is very hard to call. No one knows if or how long we’ll be in a deflationary cycle and no one knows if or when an inflationary cycle will start. Once an inflationary cycle starts gold would be a good investment but for now I plan to stay away form in as an investment theme.
I bought a small volume of physical gold and I have it in a safety deposit box just as insurance. I am able buy physical gold and put it into a safety deposit box even when I think is going down by also selling short financial gold (GLD) via the stock market. This called a physical/financial spread and it allows you to own gold without worrying about the value of the stuff you own. This will open you up to all kinds of issues regarding taxes and margining… This is a nice way to own gold without have much exposure to actual gold prices.
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 easy 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 2-5 years.
Oil stock may be a good place to put a little money in this summer. If the dollar weakens and/or inflation takes hold these stocks will outperform. I own shares of BP for its high yield.
Domestic Stocks
Stocks are cheap and most likely going to get cheaper this summer!
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.
Summary of Mark(et) US Economic Indicators
GDP Growth – Stabilizing
Unemployment – Very High and increasing
Federal Reserve Bias – Printing Money
Inflation – Neutral
Consumer Spending – Down but stabilizing
Corporate profits Growth Rate – Stabilizing
Real Estate Market – Down
Budget Deficit – Excessive
Dollar – Weakening
Volatility Index – Down from highs, stabilizing
Technical Indicators – Positive stock, negative bonds
Liquidity – Low but improving
So… What is the Plan?
I have gotten a little less pessimistic not because things have gotten better but they haven’t continued to collapse. I had a market bottom target of around 550 – 600 on the S&P 500 and this number is based on historical price/earnings multiples and previous bear market bottoms but now think we hit the low of 675 that we hit in March will hold. I plan invest in high dividend stocks, oil, commodities, and emerging markets on any major pull back.
I am only partially invested now mostly long China, Australia and oil stocks while being short the S&P 500, short 20+ year treasuries (TBT), and the US Dollar. I expect to become a long term investor this year possible this summer or fall. My goal is to fully invest when the market pulls back to 750 on the S&P 500 (currently at 879).
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 social security 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 in the long run… I missed out of the explosive growth in China the first time; I won’t miss out a second.
So, if I expect inflation wouldn’t I invest in gold? Well the problem, as I see it, is that gold produces no real value. They dig it up from underground, refine it, transport it, and then store it in a bank vault underground. That brings us to the theme of this report (and I made you read to this point to get to it). Oil…
Look, we were having real troubles keeping up with oil demand when the world economy was good, if the recovery starts again oil is going to shoot up again. It is already over $60/bbl already without 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 project. By the 2050 the world (even with all the green initiatives) will be consuming 50% more oil than it does today. Oil will make me rich!
Chapter 4
Oil and other things I like for 2009
Oil, oil, and more oil…
British Petroleum
Symbol BP
Sector British Oil Giant
Risk Moderate
Return High
Time Horizon Long Term (36 months – 60 months)
Tax implications Dividend tax rate of 15% applies to this instrument.
Account(s) Taxable and IRA
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… Current yield 7.4%
British Petroleum Trust
Symbol BPT
Sector Oil Trust
Risk High
Return High+
Time Horizon Long Term (36 months – 60 months)
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 10+%, 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 would be a good stock in an IRA account, if you are in a high tax bracket BP will offer better yield with less risk and volatility.
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)
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. It’s been paying a 9.2% dividend.
The same applies as the others trusts you are dealing with something very volatile that will go up and down with energy prices and you will have to deal with the complex tax rules if you were to put this into a “normal” taxable account. This would be a good stock in an IRA account, if you are in a high tax bracket BP will offer better yield with less risk and volatility.
Knightsbridge Tanker
Symbol VLCCF
Sector Oil Shipping
Risk High
Return High
Time Horizon Long Term (36 months – 60 months)
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. This company owns five doubled hauled VLCCs (Very Large Crude Carrier). 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 10+% 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)
High Yield corporate Debt ETFs
iShares iBoxx $ High Yield Corporate Debt
Symbol HYG
Sector Corporate bond ETF
Risk lower
Return Very high
Complexity simple
Time Horizon Unknown
Tax implications Consult tax advisor (Normal tax rate)
Account(s) IRA and Taxed
This is a diversified ETF with higher yielding large company bonds with a current yield near 10% (assuming no dividend cuts)
SPDR Lehman High Yield Bond (JNK)
Symbol JNK
Sector Corporate junk bond ETF
Risk Very High
Return Very High
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal tax rates)
Account(s) IRA and Taxed
This is a diversified ETF with higher yielding large company junk bonds (non investment grade) with a current yield near 13% (assuming no dividend cuts)
Bets against the US Bond market
UltraShort Lehman 20+ Trsy ProShares
Symbol TBT
Sector 2x leveraged short US long Bond EFT
Risk Speculative
Return high
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal)
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.
iShares Lehman TIPS Bond
Symbol TIP
Sector Treasury Inflation Protected bond ETF
Risk Lower
Return Moderate
Complexity Simple
Time Horizon Unknown
Tax implications Consult tax advisor (normal)
Account(s) IRA and Taxed
The investment seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Lehman Brothers U.S. TIPS index
Chapter 5
International watch list 2009
2009 Consensuses GDP Growth Forecast by Country
| |2009 |2010 | |2009 |2010 |
|China |7.5 |8.5 |Spain |-4.0 |-0.8 |
|India |5.4 |6.5 |U.K. |-4.2 |0.2 |
|Middle East |2.0 |3.7 |European Union |-4.7 |-0.1 |
|Africa |1.8 |4.7 |Central/Eastern Europe |-5.0 |1.0 |
|Brazil |-1.3 |2.5 |Italy |-5.1 |-0.1 |
|World total |-1.4 |2.5 |Japan |-6.0 |1.7 |
|Canada |-2.3 |1.6 |Germany |-6.2 |-0.6 |
|U.S. |-2.6 |0.8 |Russia |-6.5 |1.5 |
|France |-3.0 |0.4 |Mexico |-7.3 |3.0 |
International Investments to watch
iShares MSCI Emerging Markets Index
Symbol EEM
Sector Emerging Markets ETF
Risk Moderate
Return Moderate+
Complexity Simple
Time Horizon Long term (36 months – 60 months)
Tax implications Consult tax advisor (mostly at 15%)
Account(s) Taxed and IRA
This is a diversified one stop shop for getting your feet wet in emerging markets. I also like that fact that options are traded against this instrument. See the link below to find how diversified this instrument is.
iShares MSCI Brazil Index
Symbol EWZ
Sector International ETF
Risk Moderate
Return Moderate +
Time Horizon Long Term (36 months – 60 months)
Account(s) Taxed and IRA
With a 2.5% GDP growth expected next year, this is one way to get some exposure to South America.
Morgan Stanley Capital International Australia Index
Symbol EWA
Sector International ETF
Risk Medium
Return Medium+
Complexity Simple
Time Horizon Long term (36 months – 60 months)
Tax implications Consult tax advisor (mostly at 15%)
Account(s) Taxed and IRA
I own this to invest in China and India indirectly; I believe that Australia is a place to invest because of its raw materials and the proximity to India and China. This ETF is traded in the US that matches the Australian stock market, which is a significant supplier of raw materials to Asia. This stock has also taken hit as commodity prices have fallen.
iShares FTSE/Xinhua China 25 Index
Symbol FXI
Sector International ETF
Risk High+ + +
Return Extraordinary
Time Horizon Very Long term (5 years – 10 years)
Tax implications Consult tax advisor (mostly at 15%)
Account(s) Taxed and IRA
This ETF fell over 45% last year but when the economy recovers this will need to be a core holding for me.
Chapter 6
Mark’s Model ETF Portfolio
Asset reallocation
General profile for a several diversified portfolios
| |Risk |Balanced |Growth |Aggressive |
| |Adverse | | | |
|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 |6/30/09 Price |YTD Gain % |YTD Gain % w/ |
| |Symbol | | |w/o Div |Div |
|SPDR S&P Depository Receipts |SPY |$90.24 |$91.95 |1.89% |3.09% |
|NASDAQ 100 Trust Shares |QQQQ |$29.74 |$36.38 |22.33% |23.97% |
|DIAMONDS Trust |DIA |$87.52 |$84.66 |-3.27% |-2.74% |
|Vanguard Value VIPERs |VTV |$41.16 |$39.55 |-3.91% |-3.00% |
|iShares Russell 2000 Index |IWM |$49.24 |$48.10 |-2.32% |-2.03% |
|iShares MSCI “EAFA” |EFA |$44.86 |$45.81 |2.12% |4.22% |
|iShares MSCI Emerging Markets |EEM |$24.97 |$32.23 |29.07% |30.06% |
|iShares Lehman 20+ Year Treasury |TLT |$119.35 |$94.57 |-20.76% |-19.53% |
|iShares Lehman 7-10 Year Treasury |IEF |$98.53 |$90.67 |-7.98% |-6.61% |
|iShares Lehman Aggregate Bond |AGG |$104.20 |$102.15 |-1.97% |-0.35% |
|iShares GS $ InvesTop Corp |LQD |$101.65 |$100.28 |-1.35% |1.06% |
|iShares Lehman 1-3 Year Treasury |SHY |$84.66 |$83.71 |-1.12% |-0.29% |
The Nasdaq. Emerging Markets excelled. Clearly bonds are not a safe haven any longer.
Results for the various “no brainer” portfolios
| |Risk |Balanced |Growth |Aggressive |
| |Adverse | | | |
|’09 Return (YTD) |-0.63% |2.59% |6.23% |7.85% |
|’09 Return (implied)* |-1.26% |5.17% |12.47% |15.70% |
|’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% |
* If returns maintained their current pace for the rest of the year this would be the losses.
The more aggressive portfolio is well on its way to recoup much of its losses. The safe bet seems to be lagging.
Chapter 7
Final Thoughts
The Good
Interest rates are low and credit has become more available
The risk of depression has been greatly reduced by central banks
China is implementing “real stimulus”
Credit spreads and volatility indexes (fear indexes) are improving
Modest signs of economic stabilization are occurring around the world
The Bad
Housing prices are weak and still falling
High unemployment and trending higher
Exploding Budget deficit due to increased spending
Governments interfering/controlling free market
Congress is full of economic idiots who think they legislate human behavior
Higher Taxes in 2011 on capital/production
Very regressive carbon tax or “consumption tax” staring in 2012
Oil is moving up faster than expected
The Ugly
Recent action by the US Government has put the long term economy at risk
Potential for national debt spiral both public and private
The government has grown substantially and will continue to do so
Potential for US bonds may be downgraded
Long term effects of giving stuff away for free
Final thoughts:
I reluctantly approve of the action that the Federal Reserve has taken since its action has probably saved the credit market from total collapse, although it gambled with the credit rating of the United States of America in the process. We may have averted a depression but have raised the possibility of collapse in the US dollar that could cause higher interest rates and reduced purchasing power for all Americans. 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.
My plan is to be fully invested by the end of November (or around Dow 7000) via Ultra funds long funds, Ultra short Treasuries (TBT), Oil stocks, Emerging market investments, Australian ETF, and own one house while owing on a 30 year fixed rate mortgage at ~5% as a defense against the anticipated inflation in anticipation of our inability to create a utopian society.
The easiest thing for me to invest in right now is oil/oil stocks (after it sinks below $55 bbl). 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 $45/bbl I will move significant amounts of capital to this space.
I still don’t own much of anything “real” but have been buying “things”. I have starting looking for a weekend log cabin in Northern Virginia/West Virginia but still unable to commit myself to Baltimore for the long term at this time. In the strictest sense, I still have lots of little pieces of paper that lay claim to parts of businesses around the world but have a very real desire to own “real things”.
When everyone was borrowing I was saving and now that everyone is savings it is time for me borrow. Rarely in my life have I ever borrowed money but now I want to find ways to borrow pieces of paper (money) and own physical objects. If the dollar becomes worthless sometime in the future I will still own the objects but can payback the loan with that worthless paper. I now believe that debt is an asset if used wisely and in moderation.
This is the conclusion of my report, I hope to get the next report out by October 4th 2009 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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