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.     

Predicting Is A Tough Racket

The dollar index was up this morning though the trend since early June has been down.  If this decline contines, we'll be in uncharted waters soon.

Was there an obvious event that caused a rising dollar to morph into a falling dollar so quickly?  My search of the archives of financial websites inexplicably led me to Mahendra Prophecy Publications.  At precisely the moment the dollar was to start its steep descent, Mahendra writes:

Dollar will trade very stably. One shouldn’t miss any opportunity to buy it if it falls. Trading range will be 85.90 to 88.30. Thursday and Friday one should just load up with dollar index. By June 15 Dollar Index should reach 90.00.

And he adds, "If you don’t have any other option then please keep your house and transfer the rest into Dollar assets."

Mahendra's investing style is "inspired by Nostradamus" and "based on planet movement calculations".  A subscription to Mahendra's newsletter is a mere $3000 per year.

May the force be with you.

Jessica and Adam's Wedding

We had a wonderful time rekindling friendships at Jessica and Adam's wedding. Jessica was a trifle past toddler age when we first became friends with her parents. Now she's married a wonderful young man, Adam, and they are transparently very much in love.  You can't help but think what a bright future awaits them.  We treasure the many life experiences we've shared during that time with our "Jersey" friends.

Perhaps it was the optimism generated by the wedding, but I detected anecdotal optimism in other areas including business. Doug, a long time sales professional and now entrepreneur in the mattress business, opines that business is "better than expected". Ron has worked many years in the diet and herbal supplements business. He remarked his firm's results were unexpectedly good last year with no let up this year. In fact, the company is adding warehouse and manufacturing space to meet demand. Andy is back on the job ordering pallets of off price closeout home goods. The lines were long at Marshall's even with four clerks working the registers. Gas prices were up several pennies a gallon in the past three days.

This chart from the Consumer Metrics Institute also suggests more optimism may be warranted.   The uptick in the Institutes's Daily Growth Index (blue line) is the first in well over a year.  Should I disembark the gloom and doom economy bandwagon, at least until the next crisis or bubble? Maybe, and if so, I will point to Jessica and Adam's wedding as the catalyst.

MOO

Since starting this journal, there have been no additions or deletions to the Fiat Fantasy portfolio. I'll use my purchase of MOO on September 21 to illustrate why I bought this ETF. The weekly chart below is from TD Ameritrade's Strategy Desk platform. I wish it looked better here; hopefully, the ideas will still convey. Note I picked this chart because it offers a near perfect illustration of everything I want to see in a buy candidate. So why did I buy MOO?

GENERAL

* The trend of the general market (S&P 500) was up.

* I didn't want to "fight the Fed" and stay in cash knowing they were debasing the dollar.

* MOO is an agribusiness ETF. We prefer to invest in hard assets, natural resources, precious metals and related companies. MOO fits the bill.

PANEL 1

* MOO's stock price was rising on the weekly chart.

* The 13 week moving average had crossed above the 34 week moving average.

* Price was above the Parabolic SAR (green dots).

PANEL 2

* Both MACD period lines are rising.

* There is a gap between the MACD period lines.

PANEL 3

* The Directional Movement + (green line) is greater than the Directional Movement - (red line).

* The ADX (black line) is greater than 20.

PANEL 4

* The six week moving average of the Accumulation Distribution is greater than it was three months earlier.

These are technical indicators, but I'm a rookie, not an expert.  There are numerous websites and books available that discuss technical analysis.  I did add links to "Trader Mike" and "Mao", two excellent sources of information on trading.  Nothing about the approach described here has been tested.  We're testing it on the fly by the seat of our pants.  As the young lady says, it's my party and I'll cry if I want to.  You don't have to and shouldn't.  

Greed Is Not Good

Thursday's sharp rally in stocks, bonds, and commodities notwithstanding, in the long run, the Federal Reserve's new round of quantitative easing (QEII) will harm us all. In the short run, the wealthy will do well. They get to use all the newly printed money first.  The investing class will cope . But those without savings and investments face a daunting struggle. Prices, which are already increasing, are intentionally being forced higher by the Federal Reserve. Rising prices in this economy will be exceedingly tough on those with marginal means. The problematic and potentially destructive concentration of wealth in our country is going to increase. In a nutshell, our government is demanding that those least able to shoulder the burden of unwinding through inflation decades of government fiscal and monetary irresponsibility. This is greed of the highest order.

Consider food prices. The Department of Agriculture made the following statement last month:

Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices. Hence, food inflation is predicted to accelerate during the final months of 2010 and the first half of 2011, leading to a forecast of 2 to 3 percent food price inflation in 2011.

Accelerating food prices were forecast by the government due to commodity prices before the Federal Reserve decided to give inflation a jolt. We'll have to see, but 3% inflation could easily be a low estimate. Rising food prices hurt who the most? A Walmart clerk or a Walmart vice president?  The Wall Street banker or the retiree living on social security?  The answer is obvious.

The Girl Can't Help It

Sometimes this girl can't help it.  Can't help forsaking a plan and taking a leap into uncharted waters.  Merriam Webster defines a whim as a "capricious or eccentric and often sudden idea or turn of the mind". The Asset Class "Whims" is a both a recognition of this failing and an attempt to mitigate its impact.   My investments in a Whim are now limited to < 2% of the portfolio value.  In addition, there can only be one Whim at a time.  The current Whim is hedge against a drop in bond prices.  You know, the decline that's been predicted for more than a year.  Some Whims might work out, this one hasn't so far.  The point is that win or lose, Whims need to be restricted to give the main plan a chance to work.  Before I had a plan, all I had were whims.  Here's an account of a classic whim from years ago.

My niece's husband had just started his career as a broker.  Several family members, including me, opened accounts with his firm to help get him started.  One day he called and recommended the purchase of Metricom at about $10 a share.  Metricom was in the business of rolling out a wireless internet network based on IR technology.  The stock soon fell to about $6 and my niece's husband said it was time to pull the switch.  Stubbornly, I hung on as Metricom dropped to $2.  But hallelujah, Paul Allen, wealthy co-founder of Microsoft, announced he was making a sizable investment in Metricom.  Paul Allen, boy genius, was validating my investment in Metricom.   The stock rocketed to $90, but my back of the napkin calculation put the true value of Metricom at $250.  And as I was waiting to reach that $250 benchmark, competing technology vanquished poor Metricom and the stock crashed.  Long bankrupt, Metricom still appears on my monthly statement.  100 shares @ .001 per share = $.10.  Ten cents.  Buddy, can you spare a dime?   

Professional Allocators?

Most Fiat Fantasy asset classes are standard. One exception would be the "Professional Allocators" class. It's in the mix because I know there are people who do this for a living and I'm willing to give professional management a shot. With some, not all, of my money. Actually, the idea stems from looking for investments that held up "well" in the down market that began in 2007 and stumbling across the Permanent Portfolio (PRPFX) mutual fund. Why I hadn't discovered it earlier is odd because it's a takeoff on an older idea of Harry Browne's. In fact, I believe I watched Harry Browne on Lou Rukeyser's Wall Street Week television show. PRPFX invests in six asset classes: gold; silver; Swiss franc assets; stocks of US and foreign real estate and natural resource companies; aggressive growth stocks; and US treasury bills, bonds & other dollar assets. Here is a five year chart of PRPFX versus the S&P 500.

I wanted to make an investment in PRPFX, but had no applicable asset class. I fudged "Professional Allocators" to find a home for PRPFX. Professional Allocators is reserved for professionally managed investment vehicles that include investments in addition to traditional equities and bonds. A buddy at work many years ago told me that his father's last words were "Don't ever sell the gold stocks".  And boy, was gold in the dumper then. If my kids bench me for squandering their meager inheritance through rotten investment decisions, I would gasp "Don't ever sell PRPFX". Well, at least not until we are rid of paper debt money.

Diversity Won't Heal A Bummer Investment

Some who have lost more money than they expected in recent downturns are throwing stones at investment asset allocation and diversity. This article recommends being realistic in your expectations. Going "all in" on one, or a few, investments is too big a bet for most people. A few years ago at a meeting I attended a gentleman remarked he wasn't worried about the fate of the dollar as "most of his money was in gold".  He was my hero that evening, but I didn't have the temperament to follow suit. Nonetheless, the fiat fantasy allocation is an attempt to deal with the risks posed by paper debt money.

My allocation model is a guide. Wide ranges are used rather than discrete numbers. For example, my target percentage for US bonds is 10%. If my US bond holdings fall within 6 - 14 percent, I'm on track.  If my US bond holdings are greater than 15%, I can't purchase more US bonds and this asset class is available for rebalancing. If my US bond holdings are less than 6%, I might buy more. Cash must be available and a good investment must be identified. There's no sense investing solely for the purpose of hitting an allocation target. As Frank Shostak said in 2000 when giving an Austrian perspective on diversification:

"Proponents of modern portfolio theory argue that diversification is the key to the creation of the best possible consistent returns. We argue that one must focus on the profitability of the investments in a portfolio, before one considers their contribution to the portfolio's diversification. Consequently, whilst we agree with the general principle of diversification, we believe that the profitability of an individual investment should be the primary consideration for the investor."

Since the March 2009 lows nearly all long investments have fared well. Logically, a period when most investments trade lower is certain. During those periods, diversification into cash makes sense. Taking big losses, averaging down, and "buy and hold forever" are out.  Asset allocation and trend following are in.  Now that's hope and change you can believe in.  Sorry, election eve and all.