Be Prepared

After the commodities, and hard assets more generally, suffered through several tough days, they roared back strongly today.  These wild price swings are of concern as a key objective of ours is to avoid big portfolio losses.  We're trying to accomplish this through broad diversification, a preference for dividends, and a penchant for hard assets.  Here's my mid May resolution: at the end of each month, pay more attention to portfolio volatility.

Given my view of the world, our favorite investment has to be the Permanent Portfolio (PRPFX) managed by Michael Cuggino.  He appeared recently in the Market Watch video below.  The segment was titled "How to React to Global Crises: Be Prepared".  It is interesting to hear Michael provide some rationale for how he structures PRPFX.
 

Washington Is My Sugar Daddy

The debt ceiling fiasco and other news have prompted me to consider just how tightly the Government and I are joined at the hip.  In round numbers, 90% of the family annual income comes directly from the government: two social security payments and a federal retirement.  The Medicare benefit could be factored in and would surely raise this percentage.  Clearly my wife and I are completely dependent on the federal government for our livelihood.  If the government money vanishes, we have investments that could be used to help pay our living expenses for a period of time, especially if we don't live long and happy lives.  Approximately 70% of this money is in IRA accounts.  IRAs are tax advantaged accounts authorized by the government and the rules governing IRAs are frequently modified by the government.

Given these circumstances, the ongoing debt ceiling debate took on a sense of immediacy for me as Turbotax Timmy G. announced the Treasury Department would be unable to fully invest in the Civil Service Retirement and Disability Fund and the Government Securities fund of the Federal Employees Retirement System starting Monday. The funds "will be made whole" once the debt limit is increased, and federal retirees will be unaffected Mr. Geithner said.  But what if the debt limit is not increased?  Are Federal retiree funds going to disappear.  This ploy by Geithner is similar to Paulson's infamous threats to Congress in 2008 to get them to authorize the banker bailout.  Thanks to Barry Ritholtz at The Big Picture for the following chart showing the pace of debt ceiling increases since 1940.  The chart is turning parabolic just like many others these days.

                    











We also have reports from Europe concerning the confiscation of private pensions.  Could 401Ks and IRAs funds be confiscated here?  I don't see why not.  All you need is a market crash, some widely publicized complaints from pensioners who lost their money, a Senate hearing, a quickie Commission, an Executive Order, and poof, next thing you know-- mandatory Treasury Bond purchases by all IRA and 401K participants.  Someone has to buy the darn bonds if the Chinese won't.

I have a strong sense of vulnerability right now.  If the country is in serious financial trouble, and I believe it is, then I must be in serious financial trouble as well.  Beyond finances, we Americans are increasingly dependent on the government for everything from food stamps and healthcare to tax breaks and jobs.  All our eggs are pretty much in one basket these days and I was always taught that was a no no.            





  

Employee of the Week-- NZT

Telecom Corporation of New Zealand (NZT) was up 4.5% for the week.  We acquired NZT on April 28th primarily for the non-dollar dividend so this bump up is a pleasant surprise in a forgettable week.  The primary reason for writing this entry is to determine what might be behind the advance.

On April 20th, NZT and partner Vodafone  for a government contract to deliver broadband telecommunications services to rural new Zealand.  Under this agreement with the Government, Vodafone and Telecom will build and deliver open-access rural broadband infrastructure that delivers 100 Mbps connections to approximately 750 rural schools and 6 hospitals, and a minimum 5Mbps fixed and wireless broadband service to more than 80% of rural homes and businesses.
Telecom will build the fixed infrastructure and Vodafone will build the wireless towers.  Government funding for the project is NZ $285 million.

Reuters reports that longer term, NZT has offered to split the company in order to compete for the NZ $5.9 billion nationwide broadband network funding.  The government's proposal prevents retailers of phone and Internet service providers, such as NZT, from building the network.   

The only other news I could uncover is Street Wire upgraded NZT from Hold to Buy. 

Here's the chart.

 

Don't Fight The Fed?

Somehow I can't shake the feeling that every investor is being herded around like sheep.  There was a comment over on Turd Ferguson's site today by Jon-Erik who says:

i cant get over how unbelievably ironic the fight against commodity speculators.........the fed creates QE2, forces everyone into risk assets (crude, gold, stocks) because the market has no other choice, and then congress cries bloody murder when people do what they are told  

My thoughts exactly.  Permit me a decent return on savings and I'll become a wildly conservative CD investor and bond coupon clipper.  But don't blame me for taking on risk and speculating when government itself is purposefully undermining my assets and those of most everyone on the planet.

There are some notable money managers resisting the government's prodding.  Jim Rogers said today he will shorting US bonds (as is Bill Gross) and sticking with commodities.  Jeremy Grantham's May market commentary includes the following snippet: So now is not the time to float along with the Fed, but to fight it.  I believe what he means first and foremost is to reduce your exposure to US equities.  "Don't Fight The Fed" has been sound advice for as long as I can remember, but the future could always turn out to be different. 

   

Five Grams of Gold

I accessed my new Bullion Vault account Monday evening and made a bid for five grams of gold.  Imagine my surprise when the bid was accepted and I now own five grams of gold stored in a Zurich vault.  I'm was not surprised about the bid acceptance but rather the whole concept of someone with my resources buying gold and having it stored in Switzerland.  Delusions of grandeur comes to mind.  The five grams cost $244.46 including commission so we're not exactly shaking up the metals trading kingpins. 

There were some bumps in the road getting to this point and we've got at least one more registration hurdle still outstanding.  It took over a month and two emails to get the account funded.  No explanation for the delays was provided.  Bullion Vault's website was not that easy for me to use.  In the States we're accustomed to pricing gold in ounces not kilograms.  The site implies the minimum order is .01 kilograms, but that's not the case.  The "Order Board" and "Market Depth" windows don't help me understand how my micro five gram bid got filled.  In fairness, I need to spend more time learning about the Bullion Vault process before being overly critical.  Alan's Money Blog has a more comprehensive and positive review.

The only other news to report is we purchased the Indonesian ETF (IDX) yesterday @ $31.12 a share.  Happily, we're off to a good start as IDX was up about 1.5% today. 

Some Things I'd Like To Do

1. Short the Erie Indemnity Company (ERIE), an insurance company with an Apple like chart.  It's priced too high-- yield is under 3%.  The chart looks like the stock is beginning to roll over.  I can't do it for several reasons especially the low average daily volume of about 30K shares.

2. Deliver some really disgusting coffee or pizza to the analysts at Stifel (an obscure brokerage house) for downgrading Fifth Street Finance (FSC) today.  Yes, I know, like the TSA gropers, they're only doing their job, but FSC was down 8% for the week and that's painful.  It seems like everybody wants to take a shot at FSC these days.  The fat dividend will help kill the pain we may have to endure with this one.

3.  Buy Eli Lilly (LLY).  The chart is favorable and others in the group like Bristol Myers are also moving up.  But LLY would have to be a whim on a short leash.  We'll see Monday morning.

4.  Buy the Indonesian ETF (IDX).  We owned it before and sold on Feb 16.  It's gone up ever since.  So buying IDX is both good medicine and good training.  I thank Trader Mark for the reminder.  Monday we'll go shopping for IDX.
 

Don't Tell The Kids

Yes, please don't tell the kids dear old Enid is blowing their inheritance.  They're liable to have me committed, or at least gin up an intervention, if they knew I bought a few silver coins today.  Not a lot, believe me, but when SLV plowed through $34.45 like a McCormick reaper on a half acre field, I got a tad heated.  So here's the plan:  as long as SLV is below $34.45, we'll dollar cost average a couple of coins each month and let the chips fall where they may.

The investment winds shifted unbelievably fast this week and we're likely to face our first test with a truly bearish market.  Our investments are long term proposistions.  I like to think we're sailing a fixed keel boat, not a centerboard board.  We have no sell signals for bonds and precious metals.  If need be, we'll sell other holdings based on either a 13/34 weekly moving average cross or dividend yield criteria.  At least as of tonight, nothing meets our "sell" criteria.