WHIMsical TOT

Well it didn't take long to jump back into and buy the one whim I permit myself.  We bought Total S.A. (TOT), the giant energy company, this morning @ $58.69.  We have a mental stop at $53.40.

A non-US energy company paying a hefty dividend could fit in many places in the portfolio.  TOT makes up about 4% of the energy ETF (IXC) we own so it's not adding diversification.  It just a whim and we're most likely to sell soon, hopefully with a gain.

We start back to the tundra tomorrow.  78 degrees here, 20 degrees at home-- what's wrong with this picture?  

Early January Results

January was not a good month as the portfolio was down .89% compared with a return of 1.56% for the S&P 500.  All our precious metals related holdings lost money this month.  BPT was also down sharply.  Most other holdings held their own. Very quietly the US REIT VNQ turned in a solid performance.

All asset classes remain within their target ranges.  After a two month free-fall, the gold miners ETF GDX is the closest holding to a sell signal.  Then again, GDX bounced a bit this week.  While there's nothing like rioting in the streets to give the gold miners a pop, I hope the increased mayhem in the Middle East subsides quickly.    

Bye TMV

Sold the position in Direxion Daily 20+ Yr Trsy Bear 3X Shrs (TMV) this morning for a loss of about 30%.  TMV is a 300% inverse long bond ETF.  I bought it as a hedge against falling bond prices some of which is happening though slow as molasses.  What prompted me sell it today was the realization that over the past year I had reduced bond holdings significantly and therefore no longer needed the hedge.  Like all insurance, I didn't like paying the premium for TMV, but it was protection that seemed necessary at the time.  C'est la vie. 

Taking a Few Across the Bow

It hasn't been entirely smooth sailing these past few weeks.  The Indonesian ETF (IDX) has weakened considerably.  The precious metals have been taking on water for about a month.  Tyler Lewis at Seeking Alpha wrote an unfavorable piece on the BP Prudhoe Bay Royalty Trust (BPT) yesterday and it tanked nearly 9%.  Nonetheless, longer term trends remain intact and supportive of the fiat fantasy portfolio.

A key trend has been has been rising government debt and today's news that the government's debt is now forecast to be $414 billion more than the August forecast certainly keeps that trend intact.  Less than half a year and the forecast is light by nearly half a trillion dollars.  After briefly presenting the numbers, the article turns to the usual tiresome political arguments as if there were some way out of this mess if the Republicrats could just get along with one another.  Sadly, there isn't.

Financial chicanery is another theme that remains in place as yesterday's news that the FASB bowed to pressure by the banks.  As noted by Zerohedge, the banks get to report loans on their books at inflated prices rather than market prices keeping the lipstick on a pig so to speak.  How can one judge the safety of a bank when they are permitted to use fairy tale accounting?  There were 157 bank failures in 2010 whereas prior to 2008 the number was typically a half dozen or so.  We won't be buying bank stocks anytime soon. 

But here's something you can take to the bank-- the fiat Federal Reserve Note is back to slowly sinking. 

A weekly chart of UUP is even more telling.  Tonight the phrase "Commodity Prices Still Falling Despite Weakening Dollar" is all over the internet.  The agricultural commodities and precious metals were up today so the writer is focusing on oil.

Faced with unimaginable debt, government and financial systems controlled by powerful self-interests, and a weakening currency, emphasizing hard asset investments still seems prudent.  Put it this way, if you a had to chose whether to hoard a $10,000 bill or $10,000 of gold for 10 years starting today, which would you chose?    

 
    

Let Me Down Easy

There's been some serious tremors in the municipal bond world recently.  The uproar started when Merdith Whitney wrote a report stating there would be a spate of municipal bond defaults this year.  Fine, who cares-- nobody reads reports?  But then she had the temerity to go on CNN and 60 Minutes (about 3:30 minutes in) and make her case to a wider audience.   In October 2008 Ms Whitney was ranked as one of Fortune 500’s “50 Most Powerful Women in Business" and in 2008 she was named CNBC's "Power Player of the Year".  Bottom line-- she's been more often right than wrong concerning the financial markets.

Jake Zamansky notes the shoot the messenger cockroaches on Wall Street wasted no time coming out of the woodwork to belittle Ms Whitney.  Why was her prediction so shocking it got everyone in a tizzy?  Everyone knows Illinois hasn't been paying it's bills.  Everyone knows New York will need to borrow money to fund it's budget.  Everyone knows California's Governor Brown and before him the Guvernator have declared a state of fiscal emergency.  Bernanke has had to go on record saying the Fed will not prop up the states.  And yesterday we read a startling article floated in the NY Times analyzing the pros and cons of letting states declare bankruptcy. 

Here is the opening sentence from the Times article:

Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.  

Let's hold up a second here:  influential leaders are now discussing how to deal with states defaulting on their obligations.  Obligations to creditors, retired and active workers, and residents.  The next step will likely be the formation of a Statehood Default Commission co-chaired by Charles Rangel and Rod Bogoyavich.  Keep in mind a state bankruptcy will be tricky to finesse.  The politicians can't afford to short change the big banks and public employee unions because they're needed to fund the 2012 political campaigns.

The Times prints a story like this for a purpose.  My thought is we're being conditioned to expect and accept another aspect of the "new normal".  Events that seemed implausible a few years ago now appear to be just beyond the horizon.  So we thank Ms Whitney and the Times for preparing us-- it's good to be let down easy.


 

Reality Sets In

Back on December 22 I described a way to turn the fiat fantasy portfolio more conservative over time.  The key to the strategy was ranking the risk of the asset classes.  Frankly, I did a poor job with this ranking, failing to even consider the basis of the portfolio.  For example, I listed cash as a very conservative asset class.  But if cash means dollars, and if you're talking investing for years, is increasing dollar holdings conservative?  I don't think so.  Here is a revised list of the portfolio asset classes by risk (from low to high):

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

This may all be faulty logic, but at least it's more consistent with our approach. 

I'm not sure what made me think of the change.  When I had a little part-time business one of my more candid and well-to-do customers said her biggest fear was being old and poor.  I thought how silly given her situation, but here in Florida there are legions of poor old people.  Their income has not changed but their living costs have risen.   

Or maybe it was snippets like this, courtesy of Zerohedge:

   Bill Gross had a great sound bite at Forbes' annual investing roundtable:

I don't know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

  Gross' statement came right after the following zinger from Marc Faber:

Janet Yellen, vice chair of the Federal Reserve, said about a year ago that if it were possible to push interest rates into negative territory, she would vote for that. This is a very important statement because it implies that the Fed will keep real interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn't value their wealth in dollars because one day, in dollars, everyone will be a billionaire.  

Then I clipped this quote from Richard Russell of the Dow Theory Letters from somewhere:

Gold pays no interest because it is ultimately safe. Gold is the only currency that has lasted through the centuries, going back 6,000 years. Currencies have to pay interest so that they will be attractive enough for people to hold them. As a rule, the poorer and riskier the nation, the more its currency must pay in interest in order to attract investors. Normally, the dollar would be paying an attractive rate of interest, except for the manipulations of the Fed. Thus short rates in the US are around zero, courtesy of the Fed.

The United States has been living with a completely fiat currency since 1971.  Going about daily business, one doesn't see many reasons to be overly concerned.  There's food on the shelves and fuel at the gas station.  Prices are going up, but not radically nor suddenly.  The debt is a gizillion dollars, but who can appreciate a gizillion of anything.  Still, writers and others I trust make a convincing case that our financial and political systems are in a terrible mess.  Coping with this reality is going to require unorthodoxy and conviction.            

        

Employee of The Week-- MOO

The Market Vectors Agribusiness ETF (MOO) is this week's employee of note given its 3.9% appreciation.  MOO pays a dividend of 1.3% and has had a total return of nearly 41% since its beginning in September 2007.

The five largest holdings are Mosaic, Deere, Monsanto, Wilmar International (an Asian agribusiness giant), and Potash.  MOO's holdings are involved with all aspects of agriculture:  fertilizers, farm equipment, seeds, herbicides, and food products such as rice, oils, etc.  CRBA is a another agribusiness ETF with similar returns but its volume is quite small.  We also own the futures based agricultural commodities ETF DBA.  Looking at the following chart (courtesy of ETFreplay) showing the total returns of MOO (green), DBA (blue), SPY (yellow), and BND (white), it's clear that investments in agriculture have fared well over the past several years. 

New Holding and Precious Metal Musings

CPFL Energia S.A. CPFL Energia (CPL), a Brazilian electric utility, joined the team today.  The dividend is more than 7% and the stock is trending up.  Here's the chart--

The precious metals sold off this week and our PHYS position is barely above it's mental stop.  Given the name of this journal, it should be no surprise that selling any precious metal holding is not something I look forward to.  Though I may sell PHYS, I will try to take advantage of any fall in precious metal prices to buy a few silver or gold coins. 

Signs that the dollar is in increasing jeopardy are popping up everywhere.  It's noteworthy that several states are considering how they would cope with a failed dollar.  The video below is taken from a talk given by Dr Lawrence Parks before a group considering Montana sound money legislation.  It's about an hour long and worth every minute of your time. 



Collapse of the Dollar: Testimony on MT Sound Money Bill (HB 639) from Constitutional Money on Vimeo.

The Year of Living Dangerously

One of my favorite movies, The Year of Living Dangerously, takes place in a politically unstable Indonesia.  Maybe that's a reason why I own the Indonesian ETF (IDX) which has alarmingly plunged nearly 12% in the past four trading days.  Talk about "living dangerously".

Inflation fears are reported to have prompted the sell off.  Investors are apparently dubious that the Indonesian central bank can keep core inflation under 5% given a tailwind of fast rising food prices.  The Financial Times reported last week that the UN's Food and Agriculture Organization has announced that world food prices have just surpassed the previous record last seen in 2007-2008.  Bank Indonesia kept its interest rate at a record-low 6.5 percent after a meeting last week, but these low rates (by Indonesian standards) won't hold if inflation keeps rising.

Bear in mind IDX can be volatile-- similar big price swings were seen last Spring.  Much of the retreat could be simple profit taking given the rise in IDX since March 2009.  Nonetheless, some of the shine has worn off several of the Asian emerging markets.  In order to avoid a big loss, my response will be to sell IDX when it records a weekly close below 74.17.    

Up 92% Today

Central Virginia Bankshares Inc (CVBK) was up 92% today.  Unfortunately, it's a holding in the "Change of Heart" portfolio, our just for fun not real money portfolio.  The entire portfolio is up about 15% in three weeks.  I've spent next to zippo time managing this portfolio so I've either discovered the holy grail of investing or it's another case of plain dumb luck.  Life experience suggests the latter possibility is correct, but hope does spring eternal.

Back in the real world, there's been a crescendo of recent chatter about the coming demise of the precious metals in 2011.  I suppose such a prediction is only natural after the remarkable run gold and silver have had.  All I can say is the weekly chart of GLD below still looks positive to me.

          

New Year, First Impressions

In the Manasota Key / Englewood / Port Charlotte area of Florida there is an abundance of homes for sale.  For rent as well.  Buying opportunity?  Well, who knows really, but best to have a long time frame.  Here's a chart showing the housing price trend for Port Charlotte.

This is not the only sign here of a faltering economy.  Today we stopped by the Charlotte County Parks and Recreation offices to pick up a seasonal beach pass.  The doors were locked even though an hours of operation sign said they should be open for business.  At the beach we asked a county employee why they were closed.  He said the department was short staffed and could not maintain regular hours.

So as we enter the new year, we have Illinois failing to pay it's bills, Charlotte county Florida unable to maintain business hours, and New York City municipal workers unwilling to plow snow when needed.  You hear many predictions for 2011 so here's my one, not very original, forecast:  a growing number of state and local municipalities will be unable to meet their obligations.  Meridith Whitney lays it out in this video.