The Rush Report Q3 2010



The Q3 2010 Mark(et) Rush Review

 

By

 

Mark Rush

redgroup2@

 

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Oct 17rd 2010

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.  This document may not be used for any commercial purposes whatsoever. I reserve all Intellectual Property Rights of this document.

 

Regards,

 

Mark Rush 

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

If you are reading this then it was a success and would like to take the time to thank Trader Wasteland for their support in this endeavor. I have also dropped the portfolio section this quarter and plan to only report Mark’s Model portfolio twice a year henceforth to keep the document smaller (down to 26 pages).

Then next few months should have a few events that need to be watched to help determine how the economy is going to go and what investments to attempt. The first item on the list of things to watch this time is the US elections. This will likely be a win for the Republicans and the stock market will most likely be positive leading up to the elections. I suspect there won’t be any real “change” but I “hope” it will provide a short term boost for the capital markets.

Another item to add to the “should be watched list” is the Congressional action/inaction around the Bush tax cuts that expire at the end of December of this year. Hopefully someone somewhere will think about the impact of raising taxes on the entire population and what this will do to the consumer psychology and to the economy, well someone besides me.

Also we need to watch what the Federal Reserve is doing regarding their quantitative easing program. This is just a very new speak way of saying “printing money”, lots and lots of money. Now I may be guilty of thought crimes but it seems to that this is a surest sign that we are going to have inflation in the not too distant future.

One last quick item, if you have a traditional IRA please contact your financial advisor to determine if you should convert to a Roth IRA. I believe that you only have a few months left to convert this to a Roth IRA. It may cost you a lot in taxes now but you will never ever pay any more taxes on that money ever again (unless you die or Congress changes the rules, and seriously what are the chances of that?).

It has been a boring six months watching the markets that have moved more or less sideways and I still am very reluctant to invest right now. I have been on the sidelines for much of the past 6 months but with these items to contemplate it may be time to take some sort of action… With these thoughts as my main thesis let’s see where my humble musing takes us.

 

Regards,

 

Mark Rush

Yellow Spring, West Virginia

Chapter 1

Considerations

Quantitative Easing

The latest Federal Reserve statement that caught my eye is that the Fed is “prepared to provide additional accommodation if needed”. For those who aren’t fluent “Fed Speak” this signals that the Federal Reserve Bank is now likely to begin another round of US Bond purchases very soon. Where the Federal Reserve gets the money to buy these Treasury’s? In the old days they would fire up the presses and print dollars but thankfully with modern technology they can simply hit the enter key and presto they now have a trillion dollars (or more) to spend without killing a single tree. Ahhh, the advantages of modern technology.

People tend to do what they know and Bernanke is a student of the Great Depression and deflation. He will error on the side of overcorrecting and will cause inflation. We have been trying to solve each bubble in the economy by inadvertently creating new ones.

We started with the bubble in the late 1990’s burst so the Fed lowered interest rates to increase “liquidity” to avoid a deep recession. At that time gold was under $300/oz., oil was under $30/barrel and the total money supply was under $2 Trillion. The economy continued to be soft and then 911 occurred so we lowered interest rates even more then Congress added more money to the system by lowering taxes. By mid-2004 gold has risen to $400/oz., oil to $40/barrel and total money supply was around $3Trillion.

The liquidly created encouraged the housing bubble by injecting lots of money into the economy. So to solve the housing bubble the Fed would have liked to lower rates again but once interest rates already were at zero percent the only way to create more “liquidity” is to print money. This is where we are and we are currently deferring one problem to create another larger one further down the line. Gold has now risen to $1300/oz.; oil is now around $75/barrel during a recession while the money supply has risen to a staggering $9 Trillion.

Now the funny part of all this is the Federal Reserve doesn’t “see” any inflation. They are worried about prices falling so they are looking to inject potentially another Trillion dollars of liquidity into the system. I view inflation and the current money supply more like a large snow pack on the side of a mountain. You may be just trying to build a snowball but more than likely you end up with an avalanche.

It is my opinion that we are setting the stage for inflation in the not too distant future or in the worst case we are creating another yet larger unforeseen economic problem. The next few months should start to reveal how the current economic policies are going to play out in the real world. The current game isn’t growth vs. depression but the real battle to be waged is going to take form as inflation vs. deflation.

One only needs to look at the price of grains, metals and oil to see that despite a recession that prices of commodities have been on a steady rise recently and seems to be headed higher.

Mid-term Elections

Given that the current leadership is unable to understand basic economic principles and the general population is unhappy with the current state of affairs it is very likely that the large voting block that the Democrats currently enjoy will be significantly reduced. Does this mean that that we will suddenly change course and have balance budgets and smart economic policies? No, it means that we will have gridlock for at least two years and I believe that is really needed economically.

Not that I think a change in controlling parties in Congress will solve anything (we give too much credit to politicians) but what the market wants is stability for a while. For the next couple of years you will likely see grid lock and this will give businesses and investors a change to digest all the changes that have been handed down over the past 18 months. Overall gridlock should be a positive for the stock market.

At this point no political tinkering will be able to fix the 14 years buildup that it took to get us to this point. I have made the point in previous editions that the economy is like someone who has been in a serious car wreck. While in the recovery room the patient doesn’t want a dozen doctors running in and trying new treatments every few hours. The patient needs to take it easy for a while and recover. This is what I believe the economy needs at this point and the best medicine is to stop the tinkering, stop changing the medication, and let the economy heal.

The political gridlock in Washington, this will be good in the long run for the economy and will likely lead to a stock market rally leading up to election night.

Bush Tax Cuts Expiration

Currently no legislation is in place to prevent taxes going up on everyone! Obama wants to keep the Bush tax cuts in place for the lower 95% of the population but he wants it to go higher on those making more than $200k/person or $250k per couple. At this time there is no legislation has been voted on to prevent higher taxes on anyone (this means you).

The funny thing is if Congress doesn’t do something by mid-November the IRS will have no choice but to issue its 2011 withholding requirements to business as the law is currently written (no extension of tax cuts for anyone). This means that even if Congress were to act in December, your withholdings will go up starting January 1st. Talk about pissing off the electorate…

If nothing gets done (taxes goes up on everyone), it won’t be very good for the US economy and we will have one even more pissed off electorate. More than likely something will get done but the Republicans will likely play chicken with the President and force the tax cuts for everyone. If they succeed the stock market will go up. If no tax breaks get implemented for anyone, the general population will feel betrayed and consumer confidence will plummet. The stock market will fall under this unlikely scenario. This is my nightmare scenario…

Bush Tax Cuts: Part II Corporate Special 2010 Dividends?

If universal tax breaks don’t become law expect many US companies to issue special dividends in December of this year. This will have an odd effect of making the stock market rise in December but fall more after the dividend is paid out. Unfortunately this is the most efficient way to for Corporations to reward their shareholders.

Think about it, if you were a wealthy CEO with a lot of shares in your own company, wouldn’t you decide to pay out a large dividend prior to your own tax rate doubling? The marginal tax rate on dividends will go from 20% this year to 39.6% in January.

I plan to look for companies in the upcoming weeks that have a lot of cash but not a lot to do with it. Some of the corporate cash on hand will get paid out. It will briefly rain cash on Wall Street during the closing few days of 2010…

Japan’s Economy

 

I find it a bit odd that value of the yen keeps rising in during the recent economic crisis.    Let's take a look at the long term value of the Yen in US Dollar terms.

 

This chart shows how many dollars you can purchase with 100 yen. 

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From the above chart we can see that the 10 year period prior to “the crisis” someone could have purchased 100 Yen between $0.70 and $1.00 during that period.  My interpretation of the long term trend for the yen prior to "the crisis" is, well, sideways.   Now for the trillion yen question, is current strength in the Yen justified?

 

To answer this question we “should” first determine what is actually moving up or down, is it the Yen? Is it the Dollar? Could it be both?  The problem when comparing apples to oranges is the question of did the value of the apple rise or did the value of the orange fall?  Usually we compare two things with a medium of exchange such as a stable currency but in this case we are comparing one relatively stable currency against another somewhat stable currency thus complication a simple observation like “the Yen is rising” when a more accurate statement is “the Yen is rising against the USD”.  Someone could make various legitimate arguments such as “the Yen may be stable but the Dollar has weakened due to all the quantitative easing (printing money) policy”.  There are vast number scenarios that a detailed assessment should be considered when taking into account relative value.

 

Since this a investment report and not a PhD thesis, for simplicity’s sake let us just assume that the dollar is the world reserve currency for now and assume that the Yen has indeed strengthened against this world “Reserve Currency” (gag).  I will let the reader ponder the relative value of the dollar in their spare time…

Now we must ask ourselves why is compelling about the Yen that so many people are willing to buy Japanese treasuries and lock in a sub 1% yield for the next 10 years.

 

                              Yen                USD

2 year yield               0.12%              0.48%

5 year yield               0.27%              1.42%

10 year yield             0.95%              2.61%

 

I the risks of holding Japanese treasuries for the long term is very risky just based on the currency fluctuations.  From the first chart we can see that indeed the change in relative value in the Yen has changed over 50% over the past 10 years.  As an American investor if you were to hedge Japanese bond you transactions in the currency market you would indeed lock in a loss since you would be hedging a currency lower than your own “risk free rate”.  So if rates are a good reason to invest in the Yen it must be something else?

So this must mean that there are some fundamental reasons to invest in the yen…  What we do know about Japan is that it is a country with no natural resources.  So that is a non-starter.  So what we are left with is human capital and here is where things really start to come apart.  Labor productivity growth can be one factor in a healthy economy but in Japan the average age is now 42 and rising while total population is falling.  In fact total population is expected to decrease by 25% from 127.8 million to 95.2 million by 2050 so this is certainly not a driver in the current rise in the yen.

 

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The only thing that I have found positive with the Japanese economy is that it’s somewhat stable.  It has no resources, aging population along with a shrinking population.  Considering various factors I can understand why some people may want to flock to short term safety but longer term Japan is a ticking demographic time bomb.  I shall not hold the Yen nor invest in Japan based on these facts. If you were to invest purely on demographics, China and India would be the best place for me to put my money.

Chapter 2

Indicators

 

It is time to review market indicators based on my “opinion” based on 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. Each section in bold contains my prediction from January 1st of the current year.

 

Economic Indicators

 

US Gross National Product (GDP) Growth > +2.0 % for 2010

 

It seems like we are on track to get some growth this year but Europe’s problems are putting more risk into the macroeconomic situation. Current consensus estimates for US GDP growth has been lowered to 2.7% from 3.3% earlier this year. My prediction from last year seems low now.

Early economic numbers for 2011 are looking lower for most countries including the US. Consensus forecasts for the 2011 are US +2.4%, Euro Zone +1.3%, China +8.4%, India +8.2%, and Brazil +4.5%.

 

The economy growth rate seems to be stable but not likely to expand much this year or next year

 

Unemployment of falls to < 8.5% by the end of 2010

 

I’m still not sure what I was thinking when I made this prediction… I was so wrong!!

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I hope unemployment has peaked and I am looking forward to less unemployment in the future but for now this indicator is a big negative at 9.6%.  Almost everyone (including me) believes it will be several years before we get back to “normal” unemployment rates.  It is possible that unemployment may have peaked.  If we go above 10% again it would be a very ominous sign.

 

Unemployment is very high

 

Federal Reserve holds rates steady or raises interest rates 2010

 

You can’t lower interest rates lower than zero but you can print money.  I was expecting them to raise rates toward the end of the year but with until the crisis in Europe is resolved rates will necessarily stay low. 

 

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Low rates are good for the market…

 

Inflation > 3.0% in 2010

 

The current inflation rate is around +1.1% and hopefully will stay low. The European sovereign debt crisis is putting a damper on demand and destroying wealth.  I would expect inflation to stay tame through 2011. In 2008 the total money supply was $4 Trillion (green line on chart below) currently it stands at $9 Trillion.

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Currently we are not experiencing inflation or deflation despite the vast increase money supply.

 

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 around 35%, but they tend to be a bit over optimistic and I pessimistic.

 

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 now 4.56% down from 4.8% three months ago.  The current administration’s propensity to spend should put pressure on long term interest rates and inflation expectations.  The Fed stopped buying mortgage securities in March and rates should eventually go up and that should push prices down for houses.  But for now the debt crisis has caused a flood of money to leave Europe and slosh upon our shores.   This event should help keep rates low and help support the housing market. Housing prices are up 3.8% in the past year.

 

                30 Year Mortgage Rates

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Case Shiller housing price indexes

Housing prices are stabilizing; interest rates are low

>$1,000,000,000,000.00 ($1 trillion Dollars) budget deficit for FY 2010

 

I have already been proven so incredibly wrong on this estimate.     The administration is now projecting a $1.5 trillion deficit on top of $2.2 trillion of revenue they expect to receive. 

 

How much money is the deficit?  The government is planning to deficit spend over $5,150 per person ( about $20,600 for a family of four) on top of the $7,500 per person ($30,000 for a family of four) that it actually collects.  This year’s budget actually spends more ($50,600 for a family of four) than the median US household income ($50,000).  Does this bother anyone?

 

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 the USD and US bonds in the long run

 

International value of the US dollar declining >35% in next 5 years

 

In the long run 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. 

 

The last few months have been bad for the dollar falling over 10% in value.

 

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Long term bad for US investing; Good for commodity and offshore investments

 

Improved Liquidity in 2010

 

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.  This index seems to have stabilized again.

 

(Bond market fear index)

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This indicator has improved from late 2009 and seems relatively stable

Technical Indicators

 

Technical analysis is the attempt to forecast the future direction of prices through the study of past market data.  I use Barchart ( ) to come up with an “objective” opinion of an investment.  I say objective since it is 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”.

 

Model Portfolio and other technical indicators (+100% = strong buy; -100% = strong sell)

 

US Stock              3/31/09    6/31/10      9/30/10            Link                                         

SPY                       +80%        -100%         +88% 

QQQQ                   +80%        -100%         +88%     

IWM                      +80%         -80%          +80%    

 

Foreign

EFA                       +64%       -80%         +80%    

EEM                      +72%          -80%         +96%   

 

Bonds

TLT                        -72%       +100%      +64%       

SHY                       -16%        +96%        +48%

 

Gold/Oil/Dollar Idex/Euro/Yen

GLD                        +8%        +40%        +96%     

USO                       +72%        -80%          +48%   

UUP                        +64%        +16%         -96%    

FXE                         -72%         -48%         +96%     

FXY                        -100%        +88%        +96%    

 

Volatility Index

VIX index                -24%          +80%        -24%     $VIX

 

 

The Volatility Index ($VIX) (stock market fear index)

 

I have switched back to using the CBOT VIX index instead of the VIX ETN (VXX) since the performance of the VXX has not come close to matching the VIX index. You can see the huge mismatch on this link.

^vix;range=1y;compare=vxx;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

 [pic]

 

This indicator is a good for stocks. 

 

Bonus Item…

 

In addition to my normal indicators I also like to watch the ECRI Weekly Leading Indicators.  I don’t have regular access to the data but wanted to include it in this quarter’s report.

  [pic]

A negative reading indicates increased risk for a recession but his indicator “may” be turning positive…

Technical Summary…

Shockingly all indicators are positive, (stock, bonds, metals, currencies) except for one, the US Dollar index. This may be a sign that the market is predicting a loss of value in USD.

Chapter 3

The Plan

 

Every trader reserves the right to make a more intelligent decision today than he made yesterday.  - Sheldon Natenberg

Considerations

Quantitative easing – inflation, weak dollar, higher prices

Elections – more stability, no changes in policy for 2 years

Tax cuts – potential upheaval, potential stock market gains or losses

Anemic US and European economic growth – potential stagflation?

Summary of Mark(et) Economic Indicators

GDP Growth – Positive growth but no recover

Unemployment – Unemployment is very High

Federal Reserve Bias – Quantitative easing, more money prices go higher

Inflation – Potential for inflation and higher prices for everything

Consumer Spending – This indicator remains weak but stable

Corporate profits Growth Rate – I expect earnings growth to be up >20% this year

Real Estate Market – Housing prices are stabilizing; interest rates are low

Budget Deficit – Disastrous

Dollar – signs of weakness, fiscal and monetary policies tend toward devaluation

Volatility Index – Down from high and appears to be stable

Technical Indicators – Supportive of everything except US Dollar. 

Liquidity – Quantitative easing… liquidity is being printed

I must point out that some of the “greens” above are there because I expect those items to drive investments higher but it does not necessarily mean I think they are “good” for the economy.

My thoughts on…

 

European Markets

Things in Europe still look weak and will remain so for the foreseeable future. GDP growth for 2011 is expected to weak. If we go there is double dip recession then it will be instigated by this European imprudence. I shall not make any new investments in Europe for the foreseeable future and I am currently short the Euro. I shall not invest in Europe or anything denominated in the Euro’s.

The economy and budget deficits

 

As I have stated before I will never hold long term Bonds denominated in US Dollars nor have net investments that are dependent the strength of the US dollar.  Eventually interest rates MUST GO UP, the government is going to crowd out capital to fund its social agenda.  Eventually the most likely “band aid” will involve devaluating (either directly or indirectly via quantitative easing) the US dollar.  We are starting to see the early stages of this already.

 

I can’t emphasize this enough…   I will not buy nor shall I ever hold US Treasuries Bonds (except for TIPS).  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 hard when the recovery begins.  The Federal Reserve will need to eventually raise rates and this will cause the investors in bonds to lose a lot of money.  Long term the vast debt that we are incurring and I can only come up with one conclusion and Greece has shown us how this party ends.

 

Muni bonds

 

These instruments are getting potentially very dangerous… 

 

Taxes are going to go up and people are going to want to shelter income, tax free bonds are going to go up.  I own some Muni bonds now and may be selling them when early in 2011.  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. Due to sudden inflation fears, I limit the term to maturity of my bonds to 2 years.

 

Long term these bonds will get hit with rising interest rates so the trick to Muni bonds is twofold.  First, I look for bonds that aren’t likely to default.  Muni bonds will have exposure to inflation risk, state and local default and dollar risk. 

Corporate Bonds

 

I don’t like them out more than a year or two. I believe inflation is on the horizon and bonds do poorly during inflation.

 

Also 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 I have considered is buying corporate bonds and selling (shorting) US Treasuries.  This would offer some protection from inflation and likely to yield a decent return under most circumstances but this idea isn’t very viable without a significant amount of cheap leverage.

 

Financial stocks

 

I still think that it still is too risky…  I was tempted by Goldman Sachs (GS) and own a very small position.  I will be buying more over the next year.

 

Gold

 

I fundamentally don’t like holding gold because it doesn’t produce any wealth, in fact, usually you generally need to pay someone to hold it for you (safety deposit box) or at least have some insurance to protect from theft.  Most other investments produce some sort of economic activity and generates some revenue, while gold just sits there.

 

I believe that gold is in the process of forming a bubble but the bubble is just beginning.  I think it will likely go over 1500/oz in the next couple of years.  My experience is that things to tend to go on much longer than I expect so with this mind my target $1800/oz. 

 

I reluctantly am investing in gold and platinum. I am also considering buying some gold mining stocks for the longer term.  I like mines more from a philosophical basis because at least gold mines have creates some economic activity besides storage fees.

 

I own physical gold and platinum. I will be buying options on Gold (call spreads) on the next retreat)

 

Inflation

 

If I have to type “Quantitative Easing” one more time I am going to yak! YAK…

 

I believe we are already seeing the signs of inflation and that means the prices of everything will go up.

 

Oil/Energy

 

This may be a good alternative to gold. It produces wealth for the consumer and producer.  With these thoughts in mind I hold will be purchasing Canadian oil company Suncor (SU) that harvests oil from tar sands and other oil plays. I am still short the BP $45 calls and may buy them back soon.

Domestic Stocks

 

I prefer stocks that have exposure to the emerging markets that 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.  I have IIF and VNM and waiting to buy the FXI. I will be looking at EEM also.

So… What is the Plan?

 

As the government prints more and more money that money will become less and less valuable therefore I have no choice but to start buying “stuff” before inflation kicks in. I must reluctantly face facts and looking at everything that is pointing to higher prices. I am going to start buying stocks in the next couple of weeks sell part of them after the November election. Then buy them back in Mid-November to sell them once again in Late December.

My logic for all this in and out is the market should go up the weeks prior to the election but right after the elections the irrational exuberance become self-evident that the election hasn’t solved any of our structural problems. This realization will cause a market sell off and it could be overdone to the down side. After post-election sell off, depending on the status of the tax cuts the market could rally (if the Bush tax cuts are extended) or rally due to special tax avoiding dividends (if Bush tax cuts don’t get extended). At this point I (independent of outcome) I sell all US based investments and buy emerging markets and commodity based investments.

Australia and Canada are the only two “developed” countries that I am confortable investing in. Europe, Japan, and the US all have long term structural problems although I believe the US will come out of the recession before the others developed basket cases.

Wow what an interesting few months I have ahead… Let’s cross our fingers and see if I can pull this off, both prediction and execution.

 

Chapter 4

Domestic

 

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    -24%

Tax implications    Federal Tax Free

Account(s)       Taxable accounts ONLY!!!!

 

This year instead of using SHY (short term treasury bond fund) I 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.   It currently has a 1.7% Federal tax free yield.

 

Precious Metals

Gold

Symbol     GLD

Sector  Precious Metal

Risk     Moderate

Return       Moderate +

Time Horizon        Medium term (3 months – 60 months)

Technical rating              +96%

Tax implications   Long term capital gains rate for this security is 28%

Account(s)     IRA

 

What this ETF does is allows you to buy gold as if were a stock.  Each share that you hold is equivalent to owning 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.

 

Some other stocks that I will buy after the major stock market drop this fall.  

Drugs:     AMGN, BMY, MRK, PFE

Tobacco:               BT, MO, PM

Oil/minerals:         CVX, DO, FCX, RTP, SNP, OIH

Banks:               GS, RY

Chapter 5

International Watch List

2010 Consensuses Economic Growth Forecast by Country

China |8.6% |Chile |3.5% |United States |2.7% |Japan |1.5% | |India |6.3% |Thailand |3.3% |Russia |2.5% |Argentina |1.4% | |Egypt |4.5% |South Africa |3.1% |Canada |2.4% |United Kingdom |1.3% | |Indonesia |4.5% |Turkey |3.0% |Israel |2.4% |France |1.3% | |Malaysia |3.9% |Mexico |3.0% |Pakistan |2.4% |European Union |1.2% | |Singapore |3.8% |South Korea |2.8% |Sweden |1.9% |Italy |0.9% | |Brazil |3.8% |Hong Kong |2.7% |Poland |1.9% |Spain |-0.1% | |Taiwan |3.5% |Australia |2.7% |Germany |1.6% |Venezuela |-3.4% | |International Investments to watch

Market Vectors Vietnam ETF

Symbol              VNM

Sector           International ETF

Risk              High (Speculative)

Return           Very High

Time Horizon       Very Long term (10+ years)

Technical Rating       +16%

Tax implications      Consult tax advisor

Account(s)              Taxed/IRA

 

I have talked in the past of wanting to invest in Vietnam; the great thing about our financial market is if you wait someone will create an ETF that you want.   I found this ETF and don’t know much about it but a bought a small position so that I will check on it every few months or so.  My strategy is to “set it and forget it”…  If it drops below $20 I will sell it if it goes above $30 I will buy more.  I don’t plan to buy many stocks until the fall but this will be on my list then.

 

IIF/IFN

India Closed End Funds (CEF)

Symbol                            IIF/IFN                              IFN                                 

Sector                    International CEF         International CEF

Risk              High                          High

Return              Very High Very High

Time Horizon          Long term (10+ years)   Long term (10+ years)

Technical Rating              96% 96%

Premium (Discount)               (7.7%)                   (7.0%)

Tax implications              Consult tax advisor        Consult tax advisor

Account(s)       Taxed/IRA    Taxed/IRA

 

I am back to two of my old favorites closed end funds.  They seem to be a little less volatile these days and since the country was already screwed up by its Marxist leanings the economic crisis is having less of an impact them than other more developed countries.  I won’t forget for a moment that if the world equity markets gets hammered this CEF will drop like a rock.  20 years from now India will be an economic power house on par with the US.

 

Just a reminder that a CEF is a like a mutual fund but trades as a stock.  Due to this fact a CEF can trade to a premium or a discount to the breakup value of the fund.  As always I always prefer to buy things that are discounted such as these are now.

Chapter 6

Final Thoughts

 

The Good

 

• Interest rates are low

• Gridlock is coming to Washington

• Asia’s economy seems robust and growth is real

• World GDP is projected to be positive this year and next

• New innovations and new efficiencies are creating new wealth daily

• Quantitative Easing

The Bad

 

• High US unemployment

• Higher taxes in 2011 on capital/production

• Government diverting resources from production and reallocating it to nonproduction

• Health care reform (taxes on production more resources to consumption)

• Housing crisis not over; large segment of population with mortgages and no jobs

• Political class that believes that redistribution of wealth is a means of creating it

• Quantitative Easing

 

The Ugly

 

• The European debt spiral has begun with some sovereign debt now rated as junk

• Exploding US budget deficit/national debt with risk of debt spiral

• Potential for US bonds may be downgraded

• California and other state/local governments debt situation

• The US Social Security time bomb

• Looming long term devaluation of the US dollar

• Quantitative Easing

Final thoughts:

 

I reluctantly condoned of the risky action that the Federal Reserve two years ago but I do not approve of the current spending philosophies, the expansion of government, or other foolishness of our government.  I believe that these philosophies and general contempt for capital are making things worst and are prolonging the recession.

 

We are seeing in Europe what eventually happens when a society borrows and spends more than it can produce, we got a taste of that in the housing market but homeowner and banks were bailed out by the government… The EU is bailing out Greece it’s only a matter of time before the same events that are occurring in Europe occur here in the US, except no one is going to be able to be able to come to the rescue of the US Treasury.  Dollar devaluation will be the only viable solution to the forthcoming US debt crisis.

 

Gold is a truly silly item to investment in for a modern economy but for now it is working.  Gold may go over $1500/oz by this time next year.  Longer term, investments in inflation adjusted income producing items will be the only way to conserve capital.

 

I have much more to say but many of my musing are going to have to wait for another day, luckily we can always thank the politicians and the markets for always giving me something new to write about. 

This is the conclusion of my report, the next report should be out by January 5th, 2011 and hopefully will 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

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