May 26, 2010 10:00 a.m.
Updating Our Portfolios
The world’s markets finally lost the momentum that was pushing them upward for many months. Stock indexes are below many key levels (such as the 200-day moving average). Market internals (such as the number of stocks hitting new lows and the ratio of the number of stocks advancing to those declining in price) also look bearish. Stock indexes are well below their recent highs and showing losses for the year.
Our portfolios, because of their diversification, hedges, and balance, are doing better.
The Hussman funds lagged for over a year but are more than pulling their weight now. Hussman Strategic Growth returned 4% for the last two months and Hussman Strategic Total Return returned over 2%, while the S&P 500 lost about 8%. TCW Strategic Income is flat for the last two months, while Vanguard Intermediate Term Investment Grade Bond returned about 2%. Doubleline Total Return we just added to the portfolio, but it is up 6% for the last two months. We also scored gains of over 8% with iShares COMEX Gold. The portfolios don’t have all winners. Enterprise Products Partners is down over 5% for the last two months, and Cohen & Steers Realty Shares lost a little less than 5% and came close to but did not trigger its sell signal of $48. Utility shares aren’t doing well, with American Century Utility Income losing over 6% and FBR American Gas Index down almost 10%.
Over in the Retirement Paycheck Portfolio there is more volatility, which is what we expect in return for the higher income distributions. We’ve had good results with iShares COMEX Gold, TCW Strategic Income, and the just-added Doubleline Total Return Bond, as mentioned above. Holding steady has been iShares iBoxx Investment Grade Corporate Bond. We eliminated Verizon and reduced the share of Cohen & Steers Infrastructure in the June issue posted on the web site last week. That’s good, because UTF is down over 15% the last two months.
Declines in line with the S&P 500 were generated by Cohen & Steers Closed-End Opportunity, Nicholas-Applegate Equity & Convertible Income, and Gabelli Global Gold, Natural Resources & Income. Tortoise Energy is down about 8%.
Overall, the portfolios are doing what we expected and are preserving more of our capital in market downturns than other portfolios are.
We’ve maintained diversified portfolios in the face of the powerful rally that begin March 9, 2009, because we believed the stimulus actions of global governments didn’t solve the basic problems. The U.S. is in a long-term process of deleveraging and deflation that will restrain economic growth and employment. The stimulus is being reduced or withdrawn, and the political climate makes additional stimulus unlikely. Momentum carried the markets and the economy through the early part of 2010. I think momentum is slowing, and economic growth will follow. Absent strong growth in private sector borrowing, the second half of 2010 should have slower economic growth than the first half with continuing declines in inflation and interest rates.
May 21, 2010 10:00 a.m.
The Rally Finally Stalls
Another liquidity panic is occurring. It probably won’t be as severe as the fall of 2008, but it is serious. Investors are fleeing all kinds of assets, even gold. They’re going only for U.S. Treasury bonds again.
A good capsule of the deterioration is the St. Louis Fed’s financial stress index. The index shot up recently and is at its highest level in some time.
In March 2009, investors were relieved that Fed actions would keep the economy and financial markets from complete meltdowns. In their relief, investors believed the problems that caused the financial crisis were solved and bid up the prices of all risk assets. We’ve been more concerned that the recoveries in both the markets and economy were due to artificial stimulation and could falter. In the June issue of Retirement Watch, I noted that strong rallies within long-term bear markets are usual. On average a 55% decline is followed by a rally of 25% to 135% lasting six months to 24 months. This is followed by a decline of 25% or more lasting a year or more. Investment strategist David Rosenberg, quoted in the current Barron’s, gives reason to be concerned about the recent 400 point rally instead of viewing it as a positive sign. He notes there have been 16 rallies of 400 points or more in the Dow. Twelve of those occurred while the credit bubble was bursting. The other four occurred during the tech stock bear market of the early 2000s.
Now, the news is focusing on the pitfalls and weaknesses in the economy and markets. The Greece debt crisis demonstrates that the causes of the financial crisis were not solved. They were only postponed by having private debt growth replaced by government debt growth. The government’s aren’t able to pay off this debt any more than the individuals and businesses who borrowed during the 2000s boom were able to. Kenneth Rogoff, co-author of This Time It’s Different, the definitive book on bubbles and crashes, says the Greece bailout won’t prevent default. It simply stretches it out. It also transfers some of the burden to other European countries, which can’t handle the debt load either. Defaults, inflation, and restructurings are in the future.
The U.S. economy also is not shaping up as the robust, V-shaped recovery of the headlines. One good summary is the recovery from 2008 is surprisingly strong but historically weak. This week’s Empire state survey shows that sales by businesses are cooling, and the economy is slowing. Other reports show the recovery is leaving small business behind. That’s because the growth we’ve seen is the product of government stimulus, and that has been channeled to the larger companies.
An economic recovery that leaves small business behind and that keeps unemployment high is unsustainable. Large businesses prospered by cutting costs (mainly employees). That allowed them to maintain profits though revenues were falling. Demand won’t increase while unemployment is high and people are worried about jobs and stagnant salaries.
Meredith Whitney, a widely-respect bank stock analyst, explained recently why small businesses still are having a credit crunch and the financial regulation bill will make things worse.
There’s still a lot we don’t know about the new medical insurance law. For the things we do know, here’s a good summary of the law’s likely effects and what you should do about them now.
May 13, 2010 08:10 p.m.
Hedge Funds, Greece, and more
Our portfolio of mutual funds that use hedge fund investment strategies continues to generate smooth, steady returns. It beats the S&P 500 with less risk. I’ll give a full review in the June issue of Retirement Watch. One of the problems with hedge funds and their strategies is few people really understand them. For example, a recent article argued that hedge fund strategies don’t work for most investors. Its proof was a sample of a small number of mutual funds that use only one strategy typically employed by some hedge funds.
There are a wide range of investment strategies employed by different hedge funds. To be successful you need a diversified portfolio of hedge funds, just like we use in our portfolio of hedge fund mutual funds. Compare our returns with those of these single “hedge fund” mutual funds in this article.
The markets had a positive response to the bailout of Greece, at least initially. But the bailout essentially copied the actions the U.S. took in response to the financial crisis in 2008 and 2009. That means its using a lot more debt to solve a problem caused by too much debt. Here’s an article explaining why the solution merely delays the inevitable.
Last week Freddie Mac asked the taxpayers to buy another $10 billion to cover its losses. This week, Fannie Mae asked for another $8.4 billion to cover its losses. That brings the total bill so far for both Fannie Mae and Freddie Mac to $145 billion. The losses will continue to mount for some time. As I’ve said before, the financial crisis is not over and the actions taken so far have done nothing to solve the basic problems.
May 7, 2010 12:00 p.m.
A Wilder Week-Updated
Even before yesterday’s strange plunge and partial recovery between 2:00 p.m. and 3:00 p.m., this was on track to be a volatile week in the markets. You know generally what’s happening with the market indexes. Let’s take a look at our portfolios.
The sell signal for Cohen & Steers Infrastructure (UTF) was triggered when the fund closed below $14. Sell the fund and move the proceeds to cash for now. Enterprise Products Partners (EPD) also closed below its sell signal of $32.50 yesterday. Sell it also and put the proceeds in cash. Sales are from both the Core and Managed Portfolios.
Other funds in the portfolios are doing much better than those funds and than the markets. We have positive returns in Vanguard Investment Grade Bond, Hussman Strategic Growth, Hussman Strategic Total Return, and iShares COMEX Gold. Cohen & Steers Realty Shares is falling but not near its sell signal. TCW Strategic Income is down from its high but not nearly as much as the indexes and is not close to its sell signal.
Our Managed Portfolios still are slightly positive for the year to date and in the last week and last month have declines of only half or so of the index declines. This is how our investment policy of balance and diversification is supposed to work. The Core Portfolios are doing better than the indexes over the last month but not year to date. The underperformance of the Core Portfolios is directly attributable to UTF. The Retirement Paycheck Portfolio is our most volatile, with about the same volatility as the market indexes. That’s the price we pay for the higher income yield. It has a slight loss for the year after declining over 6% this week. The payouts on its investments are intact, and investors should hold all positions for now.
I have some interesting news items from around the web this week that are worth your attention. I’ll hold several of them for my next posting.
This article has interesting takes from experts on what likely happened behind the scenes with the BP oil disaster in the Gulf of Mexico.
And this article hasn’t received as much attention as it should. The continuing enormous losses at Fannie Mae and Freddie Mac I think are why investors are concerned. One point I’ve tried to stress is that few of the problems that caused the financial meltdown of 2008 have been solved. They’ve been papered over and inflated away. This article shows a small part of the continuing cost.
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