Florida or Bust

Not very original, but the "Florida of Bust" message on a hand-made sign certainly helped my college roommate and I hitch to Florida.  We made it in 36 hours, not quite the Cortland record at the time.  Tomorrow my wife and I set off driving a similar route and we'll take nearly four days to complete the trip.  Talk about slowing down!

The first thing I do upon arrival at a vacation spot is pick up all the free real estate magazines.  Very, very dull of me.  Florida will have loads of these-- no need to worry about what to bring to the beach to read.  Why I find them so fascinating is bizarre as I could be the least likely person in the country to purchase a second home.  Unless, of course, I actually do find the bargain of a lifetime.

Which brings us to today's Case-Shiller housing report.   This past October property values fell a more than expected 0.8 percent from October 2009, the biggest year-over-year decline since December 2009.  Florida real estate has certainly been hit hard.  The stock market for the most part shrugged off the bad news.  Still, it's another sign that our economy remains anemic despite the enormous sums of your money spent by the government to rejuvenate the patient.  In this video Shiller interprets the data as best he can.  

As we begin the trip tomorrow, I'll be thinking of my parents and many aunts, uncles, and cousins who left metropolitan New York for Florida in the 1960's and 1970's.  For a while, it was wonderful there-- everything new and shiny, inexpensive, safe and friendly.  Not so much glitter now as many of their neighborhoods have turned seedy.   But things do have a way of turning around.  Eventually, and only after reaching rock bottom.  So I'll keep day dreaming with my real estate magazines on the beach looking for signals, trends, and explanations.          

Fudging End Of Year Numbers

Holiday activities deem that we call a close to the end of the month, quarter, and year prematurely.  It's now or never so to speak and we're not obligated to follow FASB rules.  Funny, who is these days?  Judging from the recent market serenity, no significant changes are anticipated next week.  If something notable happens, we'll reconsider.

With the above caveat noted, Fiat Fantasy returned 1.6% for the month.  BPT, KOL, DBA, and HAP were strong performers.  Bonds were weak, but not alarmingly so.  Frankly, I'd be thrilled to see bond prices continue to fall gradually.

The Investments and Results pages have also been updated.

Merry Christmas-- let's end the year on a high note.

Invest Your Age In- - - -What?

You've likely heard the old rule of thumb that goes something like the percentage of your portfolio allocated to bonds should match your age.  The idea, of course, is to reduce risk as you get older.  Heaven forbid you're unlucky enough to live to 110 as you'd be leveraging bonds,  not exactly a conservative move.  But seriously, what to do if, for example, you don't think bonds are all that safe?  We've had a multi decade bond rally.  What if we're headed into a multi decade bond bear market, just in time for the boomer generation no less?

Randall W. Forsyth penned this excellent Barron's piece describing subtle changes popping up regarding the world's view of the dollar.  The reason the dollar is the world's reserve currency is because of our victory in World War II.  Though international monetary arrangements last for many years, even centuries, they don't last forever.  The prospect of changes in the dollar's status on the world financial stage and our growing national debt force me to question conventional wisdom concerning the relative safety of various investments.  Given these concerns,  how should the Fiat Fantasy asset allocation be made more conservative over time?

This Social Security website page estimates the average person my age will live another 19 years.  Let's be optimistic and round up to 20 years.  Next, we collapse our 14 asset allocation classes into the following 8 in order of decreasing safety.  Again, the order is my opinion based on my world view.

PRECIOUS METALS (15)
CASH (5)
BONDS (20)
YIELD GENERATORS (10)
---------------------------
HARD ASSETS (15)
REITS (10)
PROFESSIONAL ALLOCATORS (10)
EQUITIES (15)

Currently, 50% of the portfolio is above the line in the lower risk section and 50% is below the line in the higher risk section.  Every year on my birthday, starting this August, we will make a 2% adjustment.  After one year, above the line in the lower risk section will sum to 52% and below the line will sum to 48%.  After the 20 years Social Security believes I have left, the Fiat Fantasy portfolio would have 90% allocated to the lower risk classes and only 10% allocated to the higher risk classes.  Incredibly ingenious if I don't say so myself.

What could go wrong with this nutty scheme?  My "allotted" twenty years could instantly change into 20 minutes after a freak accident, a brilliant alchemist could win the 2012 Nobel prize for chemistry for discovering a way to transmute lead into gold, huge reserves of oil could be discovered under downtown Detroit-- well gee, just about everything could go wrong.  Or to quote R. Bandler, “Disappointment requires adequate planning.”  But hey, this is our plan and we're sticking to it.            
      

Status Check

As planned we reduced our MERKX holdings.  Our return on this two year investment was a paltry 1%.  This from a fund that had the big gainer GLD in the portfolio.  The EURO's slide must have hurt.  Steep management fees were another negative.  I'm conviced-- additional MERKX shares will be sold tomorrow.

To replace MERKX, we placed a buy limit order for Wisdom Tree's ETF CCX.  The CCX concept of a basket of currencies from commodity producing countries sounds appealing, but CCX is very thinly traded now and that's a worry.  As an aside, the South African Rand ETF (SZR) looks quite strong, but like CCX, it trades only a few thousand shares daily.  Given this lack of liquidity with the currency ETFs, my currency related MERKX experience, and an earlier loss with the Dollar Bear Index ETF (UDN), I think somebody's dropping hints to skip the currency futures and move on to brighter pastures.  The CCX order is cancelled.

Happily we report that BPT bounced back quickly from last Thursday's big sell off and today is at an all time high.  And just so I don't forget, we are still trying to purchase shares of the Canada ETF (EWC) at $29.71, but the trade has moved away from us so far.                  

Commodity Currencies

Wisdom Tree's relatively new actively managed commodity currency ETF (CCX) is of interest to me as a diversification out of the dollar.  CCX seeks to achieve total returns reflective of both 1) money market rates in selected commodity-producing countries available to foreign investors and 2) changes to the value of these currencies relative to the U.S. dollar.   Constituent currencies at launch were the Australian Dollar, Brazilian Real, Canadian Dollar, Chilean Peso, Norwegian Krone, New Zealand Dollar, Russian Ruble and South African Rand.  Though it's bounced higher for the past two months, the dollar longer term faces a precarious future as it's place as the world's reserve currency is in doubt. 

Wisdom Tree clearly states CCX is not a money market style fund.  Someone wrote that it could be considered akin to an ultra short bond fund.  I'm not so sure as the "commodity currencies" took a big whack in 2007 and a 30% drop doesn't sound like a very bond like to me.  In fact, it's downright scary.  Nonetheless, if I had to pick dollars or a basket of commodity currencies as an investment for the next 10 years, I'd chose latter.

So here's the plan.  We'll sell some of our hard asset investment MERKX and replace it with CCX.  Not everyone favors the trade, but an emphasis on hard assets has been good to us.  We'll stick with what's been working.       

What Does "Hard Asset" Mean?

That depends.  The Market Vectors RVE Hard Assets Producers ETF (HAP), which we own, is a Van Eck fund.  Another Van Eck fund is the Global Hard Assets A (GHAAX).  Despite the common fund family and use of the term "hard assets", there are major differences between HAP and GHAAX.

HAP is an passively managed ETF that tracks the RVEI index.  The RVEI index reflects the performance of more than 300 companies engaged in the production and distribution of hard assets and related products and services.  Six commodity sectors are represented:  energy, agriculture, base and industrial metals, precious metals, forest products, and alternative resources.

GHAAX is an actively managed mutual fund that also invests in companies that produce and distribute hard assets.  GHAAX has a higher expense ratio than HAP, not unexpected given it's active management.  The energy sector accounts for 66% of GHAAX holdings.  For HAP, energy sector exposure is 41%.  GHAAX has a near zero exposure to agriculture while HAP has 31% of assets in this sector.  Sixty nine percent of GHAAX holdings are US companies-- for HAP it's only 38%.  To summarize, in key ways HAP is a more diversified fund than GHAAX.

As far as performance goes, GHAAX seems to have a considerable edge.  I say "seems" because as noted in a previous entry, comparing the total return of an ETF with that of a mutual fund is not straightforward.  Be that as it may, this post is just a reminder that labels like "hard asset" may in practice mean different things.  Make sure to check it out.       

  

Employee of The Week-- DBA

In a lackluster week, the PowerShares DB Agriculture ETF (DBA) took top honors with a 3.4% gain. 

This our second dance with DBA.  We sold an earlier position in October for a small gain.  Truth be told, we sold at a multi-month swing low, but that's what getting whipsawed is all about.

DBA is a fund that attempts to track the price of an index of commodities by buying futures contracts.  Commodity ETFs, especially the oil and natural gas ETFs, have been criticized for poorly tracking the underlying commodity.  This Business Week article paints a grim picture.  Between January 2007 and July 2010 DBA eked out a 3 percent total gain while the weighted average of its underlying commodity components rose 19 percent.  Business week identifies contango as a culprit stating "Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff."  An ETF like DBA has to sell its futures contracts before expiration (storage is generally not an option) and buy new contracts at a higher price even though the value of the commodity itself hasn't changed.  The loss of money suffered by these funds due to rolling over futures contracts is problematic.  What to do?

The United States Commodity Index Fund (USCI) is a newer ETF that attempts to mitigate the contango problem by usng longer term futures contracts and avoiding commodities in contango.  Ron Roland writes about the steps taken by USCI's developers to improve performance.  I hope they're successful.

Another option is to skip the commodity ETF entirely and instead buy an ETF holding businesses related to the commodity.  MOO, which we also own, is an ETF that invest in companies related to agriculture.  Here's a chart courtesy of etfreplay.com comparing the total returns of MOO and DBA for the past year.  Interestingly, despite month to month variations, in the end the two wind up at nearly the same place.  I wouldn't think this is necessarily the norm.
 

Last option-- keep these commodity ETFs on a short leash so contango doesn't bite you. 

Change of Heart

Can an investor profit by trading based on stock chart analysis?  Some unabashedly claim they can.  More importantly, can I profit from analyzing charts?  With 99% confidence, I say the answer is no.  But that remaining 1% possibility lingers, alright festers, in the back of my mind.  The Fiat Fantasy portfolio can't settle the issue-- too many constraints.  To gain insight and have some fun, we hatched a new portfolio at tickerspy.com titled Change of Heart.  Within this new portfolio we are long CVBK, SRDX, and CGA and short KRO and TIBX. 

The Change of Heart portfolio is contrarian-- it attempts to fade the trend.  We'll try to select stocks that have had strong directional moves that are now weakening.  For example, if a stock's price has been rising strongly, we're going to attempt to go short at an opportune time.  Like stepping in front of the bus as they say.  Take a look at this BPT chart courtesy of stockcharts.com:

After a phenomenal run, much loved BPT was off 4.7% today.  Is this the end of the road for BPT?  We'll see, but this is the type of bet we'll be placing within the Change Of Heart portfolio.

Happily, Change of Heart is strictly a game-- no money is involved.  For me, playing the game beats watching Dancing with the Stars, but still, there are time constraints.  Tickerspy.com will track Change of Heart results daily.  The reports here on Change of Heart performance will be sporadic, but I'll give updates from time to time.  Incidentally, the Fiat Fantasy portfolio is also represented at Tickerspy, but only a rough approximation because of Tickerspy limitations.            

A Digital Christmas

Don't tell her, but one of the things I'm getting my wife for Christmas is an MP3 player. For $50 she'll have a device that will store and play approximately 1200 songs.  Following 78, 45. and 33 RPM vinyl (those were the days, heh), 8 track (skipped these), cassette tapes (spaghetti like), and CDs (get them mixed up with DVDs all the time), we're moving ahead for better or worse.  If I left some technologies out, all I can say is, it hasn't always been easy staying current.  Just as I'm reading the directions for the MP3 player, my favorite son called to ask my opinion on how his mother would like a Kindle for Christmas.  I see a holiday theme developing.   

What's remarkable is the digital bang for the buck you get these days.  In 1975, my favorite brother-in-law stops by waving this gizmo called a hand-held calculator.  It was a basic four function Panasonic and he was delighted to pay $100 for the thing.  A few years later I had the privilege of working with Dr Robert Miller, a Harvard educated statistician.  He showed me a Boston newspaper story recounting how he and his son were one of the first to have a computer in their home.  I believe the computer was a PDP 8.  In any event, Dr Miller paid $10,000 for the thing.  He programmed this dinosaur in the FORTH computer language using paper tape.  My little MP3 player has thousands of times the storage capacity of his old beast.  Incidentally, everyone assumed Dr Miller's primary reason for buying the computer was to make advances in weather prediction, but he confided in me he was looking for an edge when playing the ponies.  He was a wonderful guy.

Many items have risen in price over the years.  I recall gasoline at 17 cents per gallon, a new car for $1700, and a new house for $9000.  But thanks to technology, price decreases are also common.  Technology has had a huge effect on how we live, work, relax, and move about.  In this remarkable video, Hans Rosling associates the rise in living standards throughout the world with income levels.  Technology is the key to these changes.    

Chartology Novice

Here's a chart showing Fiat Fantasy monthly performance and total return.  Boy, it took a long time for this novice to make the chart and then get into this journal.  I lost some labels in the process, but that's it for today.

First, Do No Harm

Too much time was spent this weekend trying to find the perfect investment.  I ran across Companhia Siderurgica Nacional and Gerdau S.A (SID), a Brazilian steel manufacturer moving into iron and cement.  SID is a hard asset play with a 7% dividend.  The railroads also seem attractive long-term and have been on a tear lately, perhaps courtesy of Warren Buffet.  Canadian National Railway Co (CNI) should do well hauling raw materials from "Cascadia". 

The fruitless anxiety of over-analysis extended to present holdings.  Our iShares S&P Developed ex-US Property Index Fund (WPS) holding should be sold from an administrative point of view.  The two international REITs we own is one too many.   In addition. the WPS chart is one of the weaker in the portfolio.  And speaking of weakness, our Singapore country ETF, EWS, is fading slightly as well.  We contemplated putting tight stops on both WPS and EWS.   Adding to concerns, the precious metals are obviously overbought.  Though I'm an unapologetic proponent of gold and silver, there must be a meaningful pullback at some point.  

And yet this morning, despite all these misgivings and trusting the medical community's most important precept "first, do no harm", we opted to let things stand as they are.  What I need to continuously etch in my feeble brain is that I am not a trader.  We should take positions based on a personal asset allocation model and an opinion on the effects of universal fiat currencies and deficit spending.  Selling is appropriate to avoid big losses, though we recognize some losses are inevitable.

The best find of the weekend was running into dshort.com and ycharts.  Every manner of chart and explanation are there.  Anyone who can speak knowledgeably about all the charts at dshort and ycharts likely has the equivalent of a MBA in finance.  Take a look.

A follow-up on BP Prudhoe Bay Royalty Trust (BPT)-- it continues to roll higher despite the dearth of public news.  Where there's smoke there's fire?  And hats off to the US equity market continues which continues to defy the skeptics (me included) and inches ahead. 

     

Employee of the Week-- BPT

The BP Prudhoe Bay Royalty Trust Company is this week's stellar employee.  BPT was up 5.7% for the week outshining the rest of the motley Fiat Fantasy crew.  Slap me upside the head as I'm getting giddy what with the pundits talking about my BPT.

Also, there is news of talks between Apache and BP over the sale of some BP assets to Apache.  Those Gulf oil spill payments must hurt.   Bottom line-- I bought BPT primarily for it's 7% dividend and now we're apparently in the midst of buyout negotiations.  As Fagin once said in Oliver, one of my favorite shows, "I'm reviewing--- the situation".

Bernanke's My Bookie

The financial crisis of 2008 pushed the big Wall Street banks / Anglo American financial banks right to the brink.  Guess what-- house prices can't rise exponentially forever.  Some wrote about what was coming, but not many listened.  Why turn off the spigot, so much money was being made thru a web of fraud.  With the West's financial empire in danger of collapse, the Federal Reserve stepped in and backstopped the risk.  Now when Fannie Mae losses billions, the American taxpayer foots the bill.  If car buyers don't buy GM cars and trucks, the American taxpayer shares in the losses to GM's bottom line.

At the peak of the crises, Wall Street oligarchs threaten my representatives in Congress-- Wall Street is too big to fail.  My representatives are weak, self-interested, and stupid-- they comply.  Shame on me for electing them.  The Fed continues to increase its risk profile.  Loans are seemingly made to any company or government that needs a dollars to stay afloat.  Even Harley Davidson, a symbol of American independence, gets a loan from the Federal Reserve.  The Fed pumps money into the system through quantitative easing to prevent asset prices from falling.  Critics use the term "pushing on a string" to describe the policy.  Thanks to Zerohedge for providing a graph depicting the Federal Reserve's latest balance sheet.  

I find the Federal Reserve offensive and have zero confidence they act on my behalf.  Bernanke says not to worry, the money we lend to risky creditors will be paid back.  Maybe, maybe not.  Recall Bernanke said the housing problem was "contained".  No matter the outcome of the Fed's high risk policies, I reject the Fed's right to jeopardize my future.  Bernanke is the bookie who places a super bowl bet for you without letting you know.  Whether or not you cash in on the bet really doesn't matter because the bookie acted without your consent.  It's time to replace or restrain Bernanke the bookie.

Damon Vrabel gives a wider and infinitely better synopsis of Federal Reserve and our economic system with Lesson 1.  Watch this 10 minute video to take the "red pill".

Enough With The Retirement Hints

Given the great number of aging baby boomers, I suppose it's not surprising that there are far too many articles written about dealing with retirement.  When I googled "retirement advice", I got 20,700,000 hits.   Where to retire?  An entire magazine is now devoted to helping you move away from the place where you live once you stop working.  How to save for retirement?  Where to vacation in retirement, as if you were working too hard in retirement.  How to stay healthy in retirement?  Unfortunately, much of the advice I see seems wrong, misleading, or just silly.

Take, for example, this piece in Yahoo's Focus On Lifelong Investing section entitled "Four Ways Sixty-Year-Olds Can Save Their Retirement" .  More than likely, the typical 69 year old is going to have a tough time resusitating his failing retirement.  But here we go with Yahoo's suggestions and some reactions:

Build a Bigger Nest Egg.  They cite an expert who says  "...if you need $30,000 per year indexed to inflation starting at age 65 until age 95, then you need $900,000 in your portfolio at age 65."  I'm in big trouble!

Check Your Asset Allocation.  No mention of precious metals or hard assets.  No mention that the US stock market has gone nowhere for 10 years.  The article notes that "...workers age 50 and over can contribute up $22,000 to their 401(k) in 2011".  Small comfort to many when the median annual salary of US workers is $38,400.

Delay Retirement.  "Even going back to school online where you can learn new skills and enhance your resume may be a solution."  Ha Ha Ha.

Delay Taking Social Security.  Good idea if both your parents both lived to be 90.

The advice given is better suited to a well off 40-year-old rather than an average 60-year-old.  Here's some suggestions about retirement from an actual happy retiree.  Give up golf-- you'll have less stress in your life and save money.  Take naps.  You need the rest and you can't spend money if you're asleep.  Laugh as much as you can.  A great place to get started is at Suddenly Senior.  Read Your Money Or Your Life to be inspired about living well with less money.

My Credit Union And The Bailout

A week ago the Federal Reserve released some details of who got the bailout money.  Wouldn't you know it, next thing Bernie Sanders wants more information.  Even I got curious enough to find propublica.org where they list all bailout recipients including my credit union, SEFCU.  According to Probublica, $145,056 was made available to SEFCU as part of the federal government's Making Homes Affordable program.  Apparently none of this money has been dispersed.

What is the Making Homes Affordable program?  Their website says--

The Obama Administration’s Making Home Affordable Program includes opportunities to modify or refinance your mortgage to make your monthly payments more affordable. It also includes the Home Affordable Foreclosure Alternatives Program for homeowners who are interested in a short sale or deed-in-lieu of foreclosure.

This is wonderful news-- my credit union has $145,056 to modify my mortgage to make my payments more affordable.  What's that you say-- I have to qualify.  I knew there was a catch.  Here are the initial qualification questions:

Is your home your primary residence?
Yes.  No condos, timeshares, or vacation homes for us.

Is the amount you owe on your first mortgage equal to or less than $729,750?
Yes.  Not even close.  No McMansions for us.

Are you having trouble paying your mortgage?
Yes.  I'm very troubled when I pay my mortgage.

Did you get your current mortgage before January 1, 2009?
Yes.

Is your payment on your first mortgage (including principal, interest, taxes, insurance and home owner's association dues, if applicable) more than 31% of your current gross income?
Yes.  I think so given the way taxes are going up.  Give me a month to refinance and get some equity out and I know it'll be more than 31%.

That was easy, but I'm still dubious.  I think I'll stop by my local SEFCU branch tomorrow and see if they'll help me out.

Angela's Sunday Special

The Sunday special at Angela's Pizza and restaurant was meatballs and spaghetti for $4.99.  Isn't that amazing.  Granted, dinner at Angela's is not fine dining-- it's just a local place mostly doing take out of decent food.  Still, that special a year ago was $6.99.  Where's all the inflation everyone is worried about?

Take a gander at this graph from Casey Research showing commodity price inflation.

The chart title is misleading-- what's shown is commodity price increases, not retail price increases.  The price of wheat has gone up 74%, not the price of a loaf of bread.  Sobering stuff all the same.

This article reports that Richard Berner at Morgan Stanley believes that, in America, commodity price inflation will not translate into food price inflation at the grocery cash register.  He predicts the direct impact of increases in food prices on overall inflation will amount to just 0.2-0.3%.  Mr Berner says Americans are a special case because:

* we eat more processed foods than the rest of the world
* rising grain prices causes herds to be slaughtered lowering the cost of meat
* sellers absorb the price increases
* consumers will substitute cheaper foods when prices rise

Mr Berner may be right, but I take issue with the last two reasons cited.  First, if Angela is serving spaghetti and meatballs for $4.99 she must be close to her limit on absorbing price increases.  You do what you have to do to stay afloat in a bad economy, but if Angela loses money by absorbing price increases for an extended period, she's out of business.  Second, if Americans eat a less expensive diet to keep their food budget static, what does this have to do with food price inflation?  Can we keep the price of steak at $7 a pound by eating beans at $1 a pound.  I suspect not forever. 

Prices have been falling for assets that depend on credit creation such as housing.  On the other hand, many everyday purchases such as food and gasoline are rising in price.  According to this website, in 2009 the average American consumer's expenditures for food, transportation, and housing were 13%, 16%, and 34% respectively.  It will be interesting to see how these percentages change in the coming years.  

A Penny For Your Thoughts

According to coinflation.com , post 1982 penny thoughts only have a melt value of $.006 because these pennies are 97.5% zinc, not copper.  With copper at $4.00 per pound, older pennies have a melt value of $.026.  Glancing over my shoulder at a not very full gallon jug of pennies I've had for years, it's obvious hoarding pennies is not an effective response to fiat money.  Penny wise and pound foolish as they say.  On the other hand, not carrying pennies around is a good way to stop excessive change from tearing holes in your pants pockets.  

There is more substantive news about the rise in copper prices.  Here's a five year copper price chart coutesy of Kitco:

Tom Lydon at ETF Trends suggests four reasons for the rise: 

1. Chilean miners strike.  Chile is the largest copper producer in the world followed by the US, Indonesia, and Peru.

2. Emerging market urbanization.  Copper wire for all those new high rise city apartments in China and India.

3. Bullish forecasts.  Speculation?  Yesterday's Barron's article  reflects the copper buzz.

4. Federal Reserve Quantitative Easing.  More construction activity means more copper usage.  I would add that as the Fed debases the dollar it contributes to the rise in copper prices.

Large copper producing copper companies are Freeport McMoran, Codelco, and BHP Billiton.  There are two ETF copper plays-- CU and COPX.  JJC is a copper futures exchange traded note (ETN).  Surpringly, copper bullion is in vogue.  Ebay has 571 "copper bullion" items for sale today including a 2010 16 oz .999 percent pure Maple Leaf bar for $10.99.  At today's prices, you will need a huge amount of space to store copper as compared to gold, or even silver, for that matter.  Nonetheless, a physical copper ETF seems a certainty.

Copper is an ancient metal as man's usage goes back thousands of years.  Ruling out chemistry class with Doc Harrington, my first recollection of copper was at the bazaars in Adana, Turkey in 1970.  Here young boys used hammers to pound and shape the metal into beautiful pieces just as had been done for centuries.  I wonder if Turkish copper smiths still make beautiful and useful treasures? 

2010 16 oz .999 FINE COPPER  BULLION BAR MAPLE LEAF

Charity II

Just a quick follow-up on Friday's entry about Quinn Brammer.  I received two very kind emails from the Brammer family.  One includes the following excerpt:

....we have been receiving letters and checks from total strangers.  The letters of encouragment have been inspiring and uplifting.   I know there will be no Christmas present better than the gift of love we have been receiving. Words cannot express how grateful we truly are.   

If you are one of those "total strangers" out there in the ether that sent a donation, many thanks.

Employee of the Week-- XME

The SPDR S&P Metals and Mining ETF, symbol XME, was up 8.61% for the week, second only to SIVR at 9.1%.  We hired XME about a year ago, one of the first steps taken in the construction of the fiat fantasy portfolio.

The top three holdings are Hecla Mining (silver and gold mining), Massey Energy (coal mining), and Arch Coal (coal).  Steel is the major sub-industry group.  In their June 30 annual report, management attributes the strong performance of XME to three factors.  First, increased demand for base metals stemming from the growth in Asian infrastructure development.  Second, the increase in the price of precious metals.  Third, the near doubling in the price of iron ore and steel. 

Charity

A few days ago an acquaintance of mine sent me an email about Quinn Brammer, a young boy from Watervliet, NY who needs heart surgery.  The family can use help meeting expenses.  Anyone who has had to cope with a major surgery in a distant city knows how expensive it is even if you have health insurance.  I don't know the Brammer family, however I'm certain the need is genuine.  Details about Quinn's situation are given in this flyer.  If you are able, please consider sending some money to one of the addresses given in the flyer.

When I first received the email about Quinn, I dismissed it as I usually do.  Not my problem.  In fact, I had to recover the message from the trash bin.  An alarm had sounded inside-- if I could ignore this particular request for charity, well then, I was morally in deep trouble.  Likely in fear of eternal damnation, I mailed a check off to the Brammer's and told some friends and family about Quinn.  Next thing you know my son writes that he' s sending a check.  Today I received a most generous contribution from my brother-in-law.  Maybe more is on the way.

In 2009 gifts to charitable organizations were $304 billion, down 3.6% from the previous year.  The majority of giving comes from individuals, not corporations and foundations.  As a percentage of income, the poor give more than the wealthy.  Some large charities have been criticized for high overhead costs and other "charities" turn out to be complete scams.  So here's my early New Years resolution as a result-- be more generous giving to those in need from my community.  Thanks Quinn.   





    

Where the Rubber Meets The Road

Today's barrage of advertisements included something I need.  Tires-- four of them.  The least expensive tire for my car was $110.  After balancing, mounting, exchange fee, taxes (you know the drill), a set of four will be in the $500 range.  If you happen to drive an SUV with 19 inch wheels, drag that home equity loan paperwork out because you are roughly talking $1000.  What's going on?  It seems a perfect storm has hit the tire buying public.

In September the US imposed an additional 35% tariff on Chinese tires.  In response China said something nasty about US chickens.  This is the problem with trade wars.  Next up is the booming economies of the emerging markets.  As incomes rise, goodbye scooter, hello BMW.  More raw materials are needed to meet increased demand.  Today Bloomberg reports that "Goodyear, the largest U.S. tire maker, expects raw-material costs to jump 35 percent for the fourth quarter."  A key raw material for tire production is natural rubber.

Natural rubber makes up about 25% of a tire depending on make, size, and other factors.  Natural rubber prices have risen a three-fold since 2008.  Floods, aging trees, speculators, and other factors are at work.  More trees have been planted but it takes years for them to produce.  Manufacturers are conducting research on synthetic materials to reduce the amount of natural rubber used in tires.  Again, another slow process.

The Market Oracle gives some suggestions to capitalize on the rubber shortage.  EWM is on my list of investment recruits.  In the meantime, I still have High Hopes for getting a new set of tires.  Oops, there goes another rubber tree plant! 





 

Everything's Working (for now)

Silver's working that's for sure.  Some, not all, SIVR hit the stop early today and we're out at 28.12.  We've had this portion of SIVR since Sep 1, 2010 and the gain was 45%.  Despite the partial sale, I'm glad we still own SIVR.  Here's the chart from stockcharts.com.

We've been lightening up on bonds and moving to shorter term bonds.  That also seems to be working.  Bond prices have been falling for a month and today was especially weak.  Google "bond prices" and you'll find nearly every hit attributes the bond price drop to "positive signs of job growth".  Exactly the same words across the entire internet.  I don't doubt the rationale, but given the uniformity of analysis, I keep envisioning a little old man hidden in a room somewhere issuing proclamations that every media outlet turns into a headline.  Our one Whim, a hedge against falling bond prices using triple short treasury bear fund TMV, which for months was in a death spiral, is beginning to do its job.

To round out the day we put in a limit order for additional shares of EWC.  Presently we're underweight non US equities and REITs.  EWC had the best chart so we put in a bid ignoring recent concerns the Canadian economy is slowing.  Maybe it's that one little old man in a room manipulating public perceptions again.  On a more positive note, Peter Grandich explains here why he favors the Canadian economy.

Precious Metals Save November

The Fiat Fantasy portfolio was up .5% in November thanks to a strong performance by the precious metals.  The S&P 500 was off -.23%.  Here's a chart of Fiat Fantasy monthly returns for the past 11 months.  Those down months in May - June are what prompted the formalization of the Fiat Fantasy portfolio.  Simply put, I thought by working harder at this investing stuff I could stop the bleeding.   

Our investment in the precious metals asset class now exceeds its upper limit.  Unless something crazy happens tonight, I'll place a 2% trailing stop on SIVR sufficient to get back within bounds.  If it weren't for this journal I know I wouldn't have the discipline to sell shares of SIVR just when it's rocketing to the moon and the buzz is all rosy.  A real-time test of reallocating is about to unfold.

The funny thing is my brother-in-law will visit this weekend.  For three years I've been chatting up gold and silver with him, but as far as I know, he hasn't taken the plunge.  I'll still recommend he buy, but I'll be selling.  Do I have to tell him I sold?  What would GS do?

Risk On Risk Off?

The Daily Pfennig is one of my favorite reads.  Usually authored by Chuck Butler, if nothing else, you'll learn more than you ever wanted to know about the University of Missouri athletic teams.  As a Nebraska fan, all I can say is there must be something else that keeps me coming back.  Today is a case in point as Chuck mentions the risk on risk off paradigm which I've heard of but don't understand well.

Chuck says--

In fact, the risk assets had a very bad week, starting with the news that N. Korea was shooting missiles at S. Korea, and it went downhill from there for the risk assets… Which for those of you new to class, consist of: Currencies, Commodities, and Equities…
In the many years of trading these three asset classes before the financial meltdown in 2008, they were never traded together, for they all had different price mechanisms and a low correlation to each other… But 2008 changed everything folks… Fundamentally, these three asset classes will someday return to the way they were traded before 2008, but for now… we’re stuck with this trading pattern…

The Economist has a slightly different take on risk on risk off.  They write (my boldface) --

DAVID Bloom, the currency strategist at HSBC, has just unveiled a fascinating analysis of the links between different asset markets. (Sadly no link because it is a privately-published research note.) He writes about the tendency in recent years for the markets to be either risk on (equities, high-yield bonds, Aussie dollar up) or risk off (bonds up, dollar up). At times, this had made life very difficult for hedge fund managers to add value since there has been little differentiation within asset classes; stocks have risen or fallen in tandem. And it makes it difficult for normal investors to diversify their portfolios.

The tendency for correlations between asset classes to go to 1 in a crisis is well known. That happened in the Asian crisis of 1997-98 and during the credit crunch, although not during the bursting of the dotcom bubble.

But Bloom has constructed a correlation index (RORO for risk on/risk off) to show how correlations have grown over time. The trend has been steadily upwards since 1990 and the RORO index is now at its highest level yet, even although the worst of the panic is over. Volatility has fallen from the 2008 high, but correlations have not.

OK, let's see if I can find common ground between the two explanations of risk on risk off.  The correlation between asset classes is higher than in the past.  Since then "risky" assets trade in sync whereas before they had a lower correlation to each other.  Same for less "risky" assets.  This seems intuitively correct as I recall that during the 2008 down turn nearly all asset classes seemed to hit the skids simultaneously.  To get some first-hand evidence, I turned to assetcorrelation.com where you can quickly check the correlation between two stocks over time. 

Just for fun I plugged in several pairs of ETFs representative of various asset classes and requested the five year correlation graph.  Unfortunately, I can't reproduce the charts here.  The dollar index up ETF (UUP) and BND should be risk off assets, however the correlation between them looks trendless.  Conversely, a risk on pair,  SPY and FXA, show a big increase in correlation since 2008.  What is always true is the variation in correlation with time.  For example, over the past three and a half years the correlation between the price of BND and the price of SPY ranges from -.6 and .4. 

We weren't able to completely confirm our own and profesional opinion regarding asset class relationship trends.  It's likely longer periods of time are required to see the trends.  Perhaps the Economist is wrong when it claims the "worst of the panic is over" and therefore one would indeed expect correlations to remain high.  Ireland, Korea, Portugal, California-- lots of reasons to panic.  We'll keep looking for more risk on risk off information.  More importantly, we should keep looking for solid, uncorrelated investments.    


          

Total Return Charts

Recently I realized that for several brokerage accounts the dividends were being paid in cash rather than additional shares.  I can't imagine why, but I changed the accounts such that dividends and interest will be reinvested.  Comparing the performance of dividend and interest paying investments will be simpler which was the primary motivation for the change.  With this issue fresh in my mind, a few days ago I ran across an article by Matt Hougan.

Hougan has two main points.  First, (nearly) all charts are price charts that do not include dividend and interest payments.  Second, because the charts don't include dividend and interest payments, all technical analysis is bogus.  I'm not a technician and will happily skip the second point.  The first point, however, is fundamental.  I've casually wondered if the charts I look at include dividends and interest payments, but until now was never certain.  Mea culpa.  Charts from brokerage accounts, stockcharts.com, Yahoo.com, MSN Money, and the like are price charts, not total return charts.  I can find two exceptions.

etfreplay.com charts are total return charts that work for ETFs, but not mutual funds or stocks.  Another option is the What If You Had Invested charts at sharebuilder.com.  Here's a sharebuilder chart of KMR's return including dividends.

And here's the KMR chart without dividends:

Don't be misled by the similar shapes-- total return with dividends is approximately twice that without dividends.

Both etfreplay and sharebuilder have limitations and won't always provide the precise chart needed.  But that's not the point.  The real point is make sure you understand the basis for the chart you're using.  When comparing investments, be particularly mindful if any pay dividends or interest.  If you're sometimes asleep at the switch like me, the old adage about comparing apples and oranges may just bite you.    

Employee of The Week-- VNQ

Vanguard's REIT Index ETF, VNQ, was up 1.2%.  Not much to write home about, but compared to his cousins,  the non US REITs that got clobbered, VNQ deserves an A for effort.  Plus, VNQ has had to deal with some harsh criticism.   Every analyst on the planet has for years been predicting the imminent collapse of commercial real estate.  All in all, well done VNQ.

Art as Elf

After too much Thanksgiving feasting, we were driving home today and I wondered how the market did.  On Wednesday, I had seen CNBC's Art Cashin comment about Black Friday markets as follows:

There's going to be an overhang through the rest of today and Friday," with a "general bias to the upside." He pointed out that historically, the Friday after Thanksgiving is the most likely day out of "the rest of the year" for markets to be up.

Here's the link but be aware you'll have to sit through a short CNBC commercial first.  Mr Cashin was wrong and the US equity markets were down on the most likely day to be up.  I like watching Mr Cashin.  I'm sure he's both honest and knowledgeable.  And so I admit to just an iota of surprise that he was wrong on this one after sounding so confident.  For Pete's sake, he was even wearing a holiday elf hat.

I Like My Bank-- USAA

This entry is not meant to be a commercial, but having a good bank is certainly part of coping with fiat funny money.  I've been a USAA client since 1967 and they have never let me down.  Teenage driver accidents, overdrawn checks, costly home owner's insurance claims, disputed credit card charges-- you name it and these folks have gone the extra mile on my behalf.

Until recently, you had to be career military to become a USAA member.  My understanding is that everyone is now eligible for many USAA services including banking.  I am most pleased with their savings and checking accounts.  I can use any local ATM and USAA refunds fees up to a limit.  I think it's $10 monthly.  We mostly use their debit/credit card which earns travel reward points.  They offer free online bill pay, something I resisted for years.  But wow, once I tried it I was hooked.  What a time saver.  The neatest new thing is depositing a check via fax.  No stamps and the check is deposited at warp speed.  USAA's website is crisp and intuitive, truly putting you in charge of your bank accounts.

All this praise is unsolicited by USAA or anyone else.  I'm simply a very satisfied customer that wants to spread the word.  In reality, it's one of my best investments.  Best wishes and happy Thanksgiving.      

      

38 And Counting

A few years ago the "simple living" theme came into vogue.  Numerous magazines and websites were spawned ostensibly to help people stamp out complexity, diversions, and general clutter.  I looked around my garage and basement and was instantly sympathetic to the idea, but never really did much about it.  The Fiat Fantasy portfolio is up to 38 holdings and management is starting to be burdensome.  In the heat of the moment, we got in over our head.  Time to simplify. 

Many say that a portfolio of 15 to 20 holdings is optimum.  Other writers advocate a very small number of holdings-- one, two, or three.  As I have both the time and interest, I think I can handle 20 + investments, but not 38.  After all, beyond our basic premise of hard assets investments, there's no "fundamental" analysis going on.  We leave that to the CFAs and other experts and just try to hitch a ride on something consistent with our theme that's going up.  Over time then, one of our objectives is to reduce the number of investments.  A good place to start is wherever two or more holdings are mostly redundant.

The global real estate holdings, WPS and RWX, are a good case in point.  There's simply not much difference between the two.  WPS has a slightly greater exposure to Asia.  RWX and WPS have an expense ratio of .59 and .48 respectively.  They share two of their top five holdings in common.  The biggest difference is volume-- WPS is thinly traded compared with RWX.  Here's a three year chart of RWX and WPS.  You might have trouble noticing there really are two lines on the graph.

My preference is RWX solely because of the greater liquidity.  By the time we have to make a decision, there may be enough information available about Vanguard's new global ex US REIT, VNQI, to make it the keeper. 

Just to wrap up, portfolio simplification is needed and we'll make it happen within the context of normal trading.  Scaling back the number of investments will take time as simplification is not the prima facia reason for a trade.

TTFN GXG

Yes, ta ta for now GXG.  The stop was hit at the open and we're out at 41.85 for a gain of 9.1%, annual rate of return of 38.2%.  Of course, later it bumped up above our 41.90 stop to close at 42.13.  You knew that was going to happen.  Hey, who cares!  As I look back over years of trying to make a buck at this investing game, there is absolutely no doubt my biggest failing has been hanging on to investments way too long.  Thank heaven this journal is going to force a change (hopefully) in that regard.  Incidentally, I'd be delighted to jump back into GXG once it shapes up.

When I was looking around at various investing sites following the 2008 downturn, one thing I spotted was the importance traders placed on selling discipline.  The message was that finding an investment going up is relatively easy, but subsequently selling that investment requires real fortitude.  Your ego, intellectual capital, manhood and who knows what else is all tied up in that one idea and then poof, it's all gone.  This is a tough obstacle to hurdle, but we're working on it.  I've heard about sports psychologists working with athletes to overcome neurosis.  Maybe we need investor psychologists? 

All asset classes remain in range so no need to be concerned about the sale of GXG causing a void.           
    

Employee of the Week-- KOL

CD Rollover?

The credit union sent my wife a certificate renewal notice as her three month CD was maturing.  Their current interest rate for a three month CD is .40% APR.  After deducting mileage, time, and federal and state income tax expenses, her profit would be less than $5.  An unforeseen early withdrawal would result in a loss.  Imagine that.  Give someone the use of $10,000 of your money for three months and you make less than $5 if all goes well.  What's the reason for this?  My grade school answer is the $10,000 must not be valuable-- no bank will pay much for it.  The banks must have all the money they need.  Money floating around everywhere.

There are many different measures of money supply.  M0, M1, M2,  TMS1, TMS2, etc.  Most of these measurements of money supply are falling, not rising.  There is one notable exception-- TMS2.  The "T" stands for true, as in Austrian economics.  Michael Pollaro explains all in this article.  Still, I'm frustrated by the lack of agreement by learned economists regarding the most useful definition of money supply .  You know what, forget money supply.  What if no one wants to rent my $10,000 because there's no demand.  OK, let's look at credit demand.

According to Gordon T. Long in Minyanville, we in fact have a credit demand problem, not a credit supply problem.  To paraphrase the Federal Reserve's July Senior Loan Officer Opinion Survey, demand for loans remains weak despite a slight easing of terms and standards.  Wow, it's getting easier to get a loan, but few new takers.  I'm not sure I accept this completely based on a little local knowledge, but let's go with it for the sake of argument.  America's population is aging and geezers like me don't like spending money.  People in general are paying down debt and saving more.  Unfortunately, this is the good news.  The other reason Long cites for lack of credit demand is more ominous.

He says we have a structural problem.  A lack of innovation and manufacturing, trade imbalances, and the inability to create as many new jobs as those being lost by technology advances.  It seems to me that when the number of available blue collar jobs began to shrink, so did prospects for a stable middle class. 

Government bailouts and Federal Reserve quantitative easings haven't improved credit demand or generated many good, permanent jobs because they're targeting money supply, not the real problems.  The risk that current policies may make economic conditions worse is a concern being expressed more frequently by other governments, the media, and economists.

Well, we've gotten way off track here.  Back to what to do about that CD and its .40% APR.  I think I'll talk my wife into letting me roll it over into something with a decent return.  Maybe that Estonian licorice company I read about?  Didn't someone blog about a Ugandan sheep herding operation?  Gee, I miss the good old days. 

Murky MERKX

The Merk Hard Currency Fund (MERKX) was my first foray into hard asset investing.  Here a snapshot of the MERKX portfolio from the latest annual report:

foreign bonds	44.1%
foreign treasuries	42.2%
US treauries	1.2%
gold	9%
foreign currencies	2.9%
other	.9%

Foreign holdings are generally from countries touted as "strong" such as Canada, Singapore, Australia, and Norway.  Everbank is one source of information on different currencies.

My original enthusiasm for MERKX is waning.  These days, a 1.3% expense ratio is practically an insult.  In my case there's also a $50 redemption fee for withdrawals sooner than 180 days.  Such policies, necessary as they may be, push me towards ETFs.  Axel Merk, the fund's manager, has been steadfast in his faith in the Euro.  He explains his rationale in this Forbes interview.  I'm dubious given all the turmoil in Europe, but the jury is still out.

MERKX has returned 6% since purchased in August 2009.  It's a narrow field-- at the moment I don't see better choices.  When we have country specific bond ETFs it will be time to reconsider.      

O Canada!

One day after fretting so much about GXG, the Columbia ETF, we took a shot at Canada and invested 1.4% of the portfolio in EWC.

What's to like?  The chart is good.  Not upside explosive, but the trend is intact.  EWC is diversified compared to many ETFs.  The dividend yield is 2.6%.  Canada is a resource rich country and consequently EWC has a large exposure to mining and material stocks.  With this purchase, all asset classes are now within their preferred ranges.  Time to sit back and relax. Oh, I almost forgot, Canadians have an anthem you can actually sing.  I'll memorize every verse and sing to the rafters as long as EWC goes up.

What's not to like?  A "Special Outlook Issue" of Money magazine arrived in the mail just after the EWC buy order was executed.  A cover page blurb shouts "More Stocks, Less Bonds", a kiss of death if ever I've seen one.  If it was Barrons or the Wall Street Journal, I'd be worried.  Doing what Money recommends has me trembling.

Slight Change In Plans

GXG rallied (as of mid afternoon), but I entered a stop at $41.90 anyway.  Given this chart, taking a profit seemed prudent.  This pattern often results in additional losses and wouldn't I regret losing money on a stock that was up 55% for the year just a few days ago.

There's another reason for placing a sell order now.  Here's a chart showing the stock price of the ETFs GXG (Columbia), ECH (Chile), EPU (Peru), and EWZ (Brazil).

The larger economy's ETF is lagging the smaller economy's ETFs.  To be fair, EWZ had a nice run prior to this year.   Peru, the late starter, is gaining traction.  And while all have dropped recently, GXG has fared worse than the others. 

The holdings of these ETFs are quite different and, upon review, GXG is not my favorite.  GXG is the most concentrated as the largest five holdings comprise 60% of the portfolio.  EWZ the least concentrated.  EWZ has a dividend yield of nearly 4%, GXG only 1.2%.  ECH has by far the largest exposure in the consumer services sector, but EPU has none.  If you're trying to limit your exposure to financials, ECH has the least at 19%.   

Despite my past and erroneous inclination to lump these South American ETFs in one basket, aside from a shared continent, they are remarkably different.  Perhaps GE compared to Whole Foods different.  Whenever GXG gets sold (today?), I'll keep an eye on ECH and EWZ as potential replacements.

Though I can't identify a specific post, I am sure Random Roger Nusbaum's writings prompted me to look into these ETF holdings a bit.  A little extra knowledge can't hurt. 

All Hands On Deck

Mid afternoon and the major averages are down approximately 1.8%.  As my son says occasionally,  " offense sells tickets, defense wins games".  Something like that anyway.  So we whiled away the afternoon being defensive and coming up with sell signals.  But there's a bit more to it than that.

A few holdings are not sold due to downward price moves.  For example, if I'm paying Michael  Cuggino to manage the Permanent Portfolio (PRPFX) on my behalf, I don't want to cut the rug out from under him.  I don't put TIPs on the chopping block because inflation is my biggest economic concern.

Many investments are either tightly linked to the basic premise of the fiat fantasy portfolio or are core to an asset class.  If these fall in price, we sell a good portion, but not all, of our investment.  If SGOL, a gold ETF, drops in price sufficiently to trigger a sell signal, we will sell about half.  During the past four months, I have sold a portion of the bond ETFs BND and EMB .  I don't want to be completely devoid of precious metals, bonds or any other asset class.  To do so would require a hubris unjustified by my track record.

Last we have the reserves.  We give each a chance to join the team, but they are sold when they take a dive.  The coal ETF KOL has done well, but when it fades we'll sell it all.  DBA, the futures based commodity ETF, seems well suited as a pinch hitter, but not the starting lineup.

Within this framework, we will sell if there is a 12% drop from the high weekly close to the current weekly close.  Despite a rough two weeks for the markets, only GXG, the Columbia ETF, is presently in this circumstance.  If GXG can't claw back above 41.90 by Friday, it will be sold.  A bad looking chart and bad looking indicators (moving averages, MACD, etc) also prompt sales.

I think of it this way.  I'm not a trader, I'm a row boat helmsman.  We have a core crew of lean and experienced rowers.  We add crew members when conditions are favorable and row like crazy with the tide.  When we encounter an incoming tide, rough seas, or strong headwinds, we lighten the load to avoid sinking the boat.


      

Lightened up on BEGBX

This afternoon we sold half our remaining investment in the American Century International Bond Fund (BEGBX).  We have owned this fund since March 2007 and have now sold most.  The rate of return on the investment is 3.6% to date.  Here's a two year chart of BEGBX and BND. 



There are several reasons for the sale.  The volatility is high compared to BND and even greater on a 20 year chart.  Changes in currency valuations raise BEGBX's volatility.  Same with EMB, but withEMB you've been rewarded for the risk taken.  Also, the BEGBX bond portfolio is heavily Eurocentric.  With all the chatter about the sovereign debt issues in Europe, I'll take a pass for now.  Lastly, BEGBX is trailing it's benchmark index.

Given all the negative comments, why not sell all of BEGBX?  Simple.  As of now, I haven't identified a  developed market, hard asset/sound currency, bond ETF.  In concert with the theme of our approach, I have visions of a portfolio with bonds from the likes of Canada, Australia, Singapore, South Korea, and Switzerland. 

Those Mischievous Leprechauns

Early afternoon here and red is flashing everywhere.  I keep a watchlist of about 80 potential investments and all are down at this moment.  Everything from Swiss Francs (FXF) to coal (KOL) is off.  The sharks are in the water and little minnows such as poor Enid are getting creamed.  What's going on?  I surely don't know but here's where the question led me.

What goes up must come down.  It's been a buoyant few months and the market is struggling to stay above the April highs.

Could it be the latest sovereign debt crisis across the briny in fair Ireland?  At that moment a leprechaun must have whispered in my ear "Enid, invest in countries with no sovereign debt".  Eureka I bleated, what a remarkable insight.  Off to the the source of all knowledge, Wikipedia, where I found a list of countries external debt.  Quickly I scrolled to identify the countries with zero debt as a percentage of GDP.  There were only two.  Macau with an economy based largely on gaming and Brunei with a Sharia legal system.  At 1% debt was Equatorial Guinea where the gap between rich and poor would make a Progressive apoplectic.

The country with the greatest debt is Luxembourg.  Every Luxembourgian(?) owes $4,028,283.  Every American owes our government's creditors $43,758.  Ireland's debt to GDP ratio is 1004% and every Irishman owes $515,671.  That's a lot of Guiness laddies. 

The leprechaun was wrong.  Debt is needed to finance economic growth; however, problems arise when debt as a percentage of GDP gets too high.  Why isn't Luxembourg or Great Britain rather than Ireland on the hot seat?  I should read Rogoff and Reinhart's bestseller This Time Is Different: Eight Centuries of Financial Folly to learn more. 

Below is a chart from http://www.usgovernmentspending.com/.  The brief pop above 100% in the 1940s stems from WWII.  What's the rationale for the rise since 1980?  Bubbles?

                

GXG

Emerging markets, Latin America, and especially my beloved Columbia ETF, GXG, took a hit today.  GXG was off 3.2%.  I found no alarming news on the net.  GXG is up 55% for the year so surely it can be forgiven one terrible day.  Here's a daily GXG chart.

Looks ominous.  GXG established a lower low and moved south of some moving averages.  Now here's the weekly chart for the same period:

This chart looks comparatively benign and a sense of serenity returns.  Still, what to do now?

The weekly chart indicates support at 41.90.  My "kill switch" sell signal of a 12% weekly closing price decline from the previous closing high gets me to 41.97.  I'm setting a mental stop of 41.90 for GXG unless other worrisome factors develop. 

Enid bought GXG on Aug 16, 2010 @ 38.18.  Poor Enid's split personalities "Trader" and "Allocator" are exerting their persona this evening.  Trader wants to sell and take profits.  Allocator wants to sell only to prevent big losses or reallocate.  For decades there was a third personality, "Buy and Hold", but a lobotomy in the Fall of 2007 cured Enid of that demon.
   

SIVR Redux

Yesterday's sudden drop in silver prices has been attributed to a change in margin requirements set by the CME Group, parent company of the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX).  Wall Street Grand treats the news unemotionally for the most part.  Other sources claim this is another example of silver price manipulation to protect the two banks that are most heavily short silver.  Either way, yesterday's price action shows how actions other than supply and demand affect the price of SIVR.

There are a number of silver "markets".  Each business day at near noon London time the London Bullion Market Association "fixes" the price of silver.  Today the price was fixed at $27.53.  It's an important benchmark.  There are several futures exchanges offering 5000 ounce and mini 1000 ounce contracts.  Here you speculate on the future price of silver.  ETFs include SIVR and SLV as well as numerous leveraged varieties.  The closed end fund CEF holds both physical gold and silver.  One can also purchase silver coins, bars, and rounds from many sources.  This is a sampling, certainly not a complete list.

Silver has more varied uses than gold.  Here's an interesting chart from the Silver Institute that depicts some aspects of use and price.

The Silver Institute states--

A primary factor affecting the price of silver is the available supply versus fabrication demand. In recent years, fabrication demand has greatly outpaced mine production forcing market participants to draw down existing stocks to meet demand. As these available sources continue to decline, silver's fundamentals continue to strengthen. However, since silver is a tangible asset, and is recognized as a store of value, its price can also be affected by changes in things such as inflation (real or perceived), changing values of paper currencies, and fluctuations in deficits and interest rates, to name a few.

I'm comfortable being an owner of silver.

Hi Ho Silver

The rise in silver (SIVR) has been extraordinary.  Apparently there are several reasons for the run up, not the least of which is the filing of several lawsuits alleging silver price manipulation.  The chart below makes it clear that the S&P 500 continues to under perform commodities, especially silver.

The chart was printed about an hour before SIVR tanked at 13:09 EST.  Was it only a coincidence that just as I started to write of the wonders of SIVR it crashed?  Rarely do I look at daily charts these days, yet now here I am looking in horror at the 2 minute SIVR chart!  Time to summon up some discipline. 

At the moment, only one of several possible sell rules is in effect for SIVR.  I'm on the hook to sell SIVR (some, not all) if there is a 12% drop in the weekly close.  A 12% drop from the high close of $26.69 (last week) means I have a mental stop to sell SIVR if the weekly close is $23.50 or less.  This is a "kill switch" sell.  If SIVR reaches a weekly close of $23.50 or less, the rule says we must lighten up on SIVR regardless of any other factors such as technical indicators, other opinions, and news reports.  Of course, if SIVR trends higher from here, so does the $23.50 mental stop.

SIVR has now stabilized at about $28.  I'll be interested to read Harvey Organ  tonight to see if he mentions the sudden drop in SIVR this afternoon.