Investing Tree

Treasury ETFs

2009-02-10T14:21:00.000-08:00

US Government Bond ETFs List
(click on symbol for data and articles)

Ameristock US Treasury Bond ETFs
Ameristock/Ryan 1 Year U.S. Treasury ETF (GKA)
Ameristock/Ryan 2 Year U.S. Treasury ETF (GKB)
Ameristock/Ryan 5 Year U.S. Treasury ETF (GKC)
Ameristock/Ryan 10 Year U.S. Treasury ETF (GKD)
Ameristock/Ryan 20 Year U.S. Treasury ETF (GKE)

Barclays iShares US Treasury Bond ETFs
iShares Lehman Short Treasury Bond Fund (SHV)
iShares Lehman 1-3 Year Treasury Bond Fund (SHY)
iShares Lehman 3-7 Year Treasury Bond Fund (IEI)
iShares Lehman 7-10 Year Treasury Bond Fund (IEF)
iShares Lehman 10-20 Year Treasury Bond Fund (TLH)
iShares Lehman 20+ Year Treasury Bond Fund (TLT)

State Street SPDR US Treasury Bond ETFs
SPDR Lehman 1-3 Month T-Bill ETF (BIL)
SPDR Lehman Intermediate Term Treasury ETF (ITE)
SPDR Lehman Long Term Treasury ETF (TLO)

Inflation Protected Bond [TIPS] ETFs
iShares Lehman TIPS Bond Fund (TIP)
SPDR Barclays TIPS ETF (IPE)

How Treasury works

2009-02-10T14:18:00.000-08:00

The number of primary dealers grew to 46 in 1988 and then declined to 21 in 2007.[4] As the result of credit crisis, the number of U.S. primary dealers has fallen to a record low of just 17 firms — nine of which are foreign financial institutions. For instance, the Treasury quarterly refunding of $55 billion in three- and 10-year notes and 30-year bonds drew mixed demand Nov. 11-13 Nomura Securities International Inc, a unit of Nomura Holdings Inc, (8604.T) plans to apply soon to be reinstated as a primary dealer for U.S. Treasuries, the Nikkei financial daily reported in its Saturday morning edition. Though the Fed no longer implements changes in monetary policy by controlling the growth rate of the money supply, the monetary aggregates are still monitored by economists as an indicator of future economic activity. One measure of the money supply, real or inflation-adjusted M2, is classified as a leading economic indicator. In order from most narrow to most broad, the three nominal monetary aggregates published weekly by the Federal Reserve Board in the H.6 Release, Money Stock Measures are: 2 M1: The most liquid forms of money including currency in the hands of the public, travelers checks, demand deposits, and other deposits against which checks can be written.M2: M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.M3: M2, plus large-denomination ($100,000 or more) time deposits, balances in institutional money market mutual funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada. When the money supply grows, consumers and businesses have relatively more money in their hands with which to purchase goods and services. Therefore, in theory, faster money supply growth should be associated with faster economic growth after a short lag of perhaps two or three quarters. However, many important changes in how financial assets are held by the public have changed over time and the relationship between money supply growth rates and the economy has deteriorated. Why doesn’t the Fed still conduct monetary policy by controlling the size of the monetary aggregates? The Fed’s Purposes and Functions (2005) publication describes the change that has occurred over time in the relationship between monetary aggregates and Gross Domestic Product (GDP): “[T]he relation between the growth in money and the growth in nominal GDP, known as ‘velocity,’ 3 can vary, often unpredictably, and this uncertainty can add to difficulties in using monetary aggregates as a guide to policy. Indeed, in the United States and many other countries with advanced financial systems over recent decades, considerable slippage and greater complexity in the relationship between money and GDP have made it more difficult to use monetary aggregates as guides to policy. In addition, the narrow and broader aggregates often give very different signals about the need to adjust policy. Accordingly, monetary aggregates have taken on less importance in policy making over time.” In 2005 Fed trades with primary dealers averaged $550 million per day. The holdings of Treasury securities maturing in more than 11 years among primary dealers rose to $8.3 billion in the week ended Jan. 14, according to the U.S. central bank. The level is near the $8.7 billion reached at the end of 2008, which was the highest since reaching $9.6 billion in the week ended Sept. 25,
2002.

“The high level of inventory in coupons suggests a very grim backdrop,” UBS Securities LLC strategists led by Chris Ahrens wrote in a note to clients today. “We suspect that counterparties looking to sell positions into this capital-constrained universe are finding that dealers are not willing to bid aggressively to add to already-burgeoning positions.” FOMC minutes: Ready to purchase long term treasury securities. Can also open the term asset backed securities loan facility for small businesses and households. FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. William Dudley, head of markets at the Federal Reserve Bank of New York and an architect of the central bank’s response to the financial crisis. As the chief of the New York Fed, Dudley will become the only one of the 12 regional Fed presidents to have a permanent vote on the policy-making.. His old responsibilities for implementing U.S. monetary and dollar policy, conducting purchases and sales of Treasuries and maintaining relationships with Wall Street’s biggest bond dealers. The Fed’s assets have grown by $1 trillion over the past year under credit programs ranging from $416 billion in term loans to banks to purchases of $350 billion in commercial paper issued by U.S. corporations. U.S. employers slashed 2.6 million jobs last year, the most since 1945, pushing the unemployment rate up to 7.2 percent in December. Home prices in 20 U.S. cities declined by 18.2 percent in November from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index. Gross domestic product probably contracted at a 5 percent annual rate from October through December, the biggest drop since 1982, The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue. The Department prints and mints all paper currency and coins in circulation through the Bureau of Engraving and Printing and the United States Mint. The Department also collects all federal taxes through the Internal Revenue Service, and manages U.S. government debt instruments. The head of the Department is the Secretary of the Treasury. The Secretary is appointed by the President, by and with the advice and consent of the Senate. Managing federal finances; Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.; Producing all postage stamps, currency, and coinage; Managing government accounts and the United States public debt; Supervising national banks and thrift institutions; Advising on domestic and international financial, monetary, economic, trade and tax policy - fiscal policy being the sum of these, and the ultimate responsibility of Congress. Enforcing Federal finance and tax laws; Investigating and prosecuting tax evaders, counterfeiters, forgers, smugglers, illicit spirits distillers, and gun law violators. Policy regarding the dollar is set by the Treasury but executed by the Federal Reserve when it buys or sells foreign currencies in the open market. By law, the Fed must follow the Treasury's instructions even if it disagrees with them. Changes in interest rates, which are the domain of the Federal Reserve, also affect the value of the dollar by making dollar-denominated financial investments more or less attractive to foreign investors. But changes in interest rates have much more of an effect on the domestic economy than operations in foreign exchange markets. (1) What role does the Treasury Department play? - It is the role of the Treasury to make sure that the U.S. government has enough money to fund the obligations of the U.S. government. Whether the government is running a fiscal surplus or deficit, it is their responsibility to determine how much money should be raised and when. It is also their responsibility to determine what the maturities of this debt should be. The amount of each offering is set by the amount of debt maturing (thus requiring refinancing) as well as any additional debt that may be needed above and beyond that (i.e. to fund that year's deficit). If you check, this is done thru weekly Treasury Bill auctions, quarterly refundings and other periodic treasury auctions such as the monthly two year note. These auctions are not conducted by Treasury. They are conducted by the Federal Reserve Bank of New York thru their network of recognized government securities dealers. The important thing to note here - these Treasury financings have absolutely no impact on the money supply. They simply determine how much Treasury debt is outstanding (i.e. the national debt). (2) What role does the Federal Reserve play - Besides facilitating the Treasury's effort to fund the operations of the government, the FED is charged (along with many other things) with determining how much money is in the system. So how does the FED expand or contract the money stock? SIT DOWN AND PAY ATTENTION. All they have to do to create more money is to buy a Treasury bill, note, or bond from one of the recognized government securities dealers (i.e. $1MM treasury security goes to FED, $1MM is released into the system as payment). IT IS JUST THAT SIMPLE. It is from this money stock creation/contraction (that can be raised or lowered at will by the FED simply by buying or selling treasury or GSE agency securities), that then gets circulated throughout the financial system, that is the starting block for determining such things as M1, M2, and M3. POINT TO REMEMBER - only the FED can monetize debt and THIS IS HOW THEY DO IT. (3) With (2) above in mind, The FED right now has a portfolio of around $800B (my numbers are probably off, but the magnitude isn't). That means that they have created $800B of "money" (which gets multiplied many times over as it winds its way thru the banking system thru the mechanism of bank deposits and bank loans (less reserve requirements)). Up until the Bear Stearns bailout, all of this $800B of "money" was backed by a portfolio of U.S. Treasury and Agency securities. With all of these "clever" new financing vehicles that were created by the FED to bailout Bear Stearns and to keep the IB's and money center banks afloat, roughly have of this $800B AAA+ portfolio has been loaned out thru the Discount Window in exchange for toxic waste garbage (sub prime MBS, etc.). [It should be noted here that the FED does not own this garbage. It is simply financing it for the street since no one else will. The hope is that they will be able to get their original securities back (and get the garbage off their books) when the credit markets normalize.] What role does FNM and FRE play? - These two GSE's are the only reason that we have a functioning 30 year fixed rate mortgage market. Reason? As government sponsored enterprises, they have long enjoyed a competitive advantage in terms of how they can fund themselves. They have historically paid only a slight premium over the level of treasury (i.e. risk free) interest rates (for any given maturity) for their money. As a result, they have been in a much better position than any private sector mortgage provider to be able to "lend long" and "borrow short". It should also be noted that FRE/FNM are the bedrock of the secondary mortgage market in the country (since they own roughly half the residential mortgages in the country and process many others in one way or another). I haven't looked in a long time, but it is my guess that the average duration of FRE and FNM's 5T of debt is under 3 years (REMEMBER THIS POINT). List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York BNP Paribas Securities Corp.
Banc of America Securities LLC*
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Securities LLC
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Merrill Lynch Government Securities Inc.*
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

Best Article on Bonds, Treasury, Int Rate changes

2009-01-25T02:31:00.000-08:00

Treasuries fell, with 30-year bonds losing the most this week in 22 years, as the U.S. readied $78 billion in debt sales over the next five days to finance fiscal stimulus spending projected to swell the deficit to $1 trillion.

Yields rose as Federal Reserve policy makers prepared to meet on Jan. 28 to decide the next monetary step aimed at lifting the economy from recession. A government report due next week is expected to show the economy contracted last quarter for the second straight three-month period.

“Supply is probably the biggest story,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of 17 primary dealers that trade with the Fed. “From here until we get the 30-year bond auction in the second week of February, there is a lot to get done.”

Thirty-year yields climbed 43 basis points on the week to 3.32 percent in New York, according to BGCantor Market Data. The gain was the most since bond yields increased 49 basis points in the five days ended April 24, 1987. The price of the 4.5 percent security maturing in May 2038 tumbled 9 25/32, or $97.81 per $1,000 face amount, to 122. The two-year note yield was up seven basis points on the week to 0.80 percent.

The benchmark 10-year note yield, used to set corporate borrowing costs and mortgage rates, rose 30 basis points, the most since increasing 35 basis points in the week ended June 13, 2008, to 2.62 percent.

5.5 Percent Contraction

Longer-term Treasuries sold off amid concern President Barack Obama will have to boost debt sales to help cushion an economy that contracted by 5.5 percent in the fourth quarter, according to the median estimate of 66 economists surveyed by Bloomberg News. The Commerce Department will release the report on gross domestic product on Jan. 30.

Obama pressed congressional leaders yesterday to reach a consensus on an economic stimulus plan expected to cost $825 billion, warning the U.S. may be facing an “unprecedented” economic crisis. The president said the legislation is “on target” for passage by mid-February.

Goldman Sachs Group Inc. on Jan. 22 raised its 2009 Treasury borrowing estimate to $2.5 trillion. The firm estimated the deficit this year at $1.4 trillion.

The Treasury will auction $8 billion in 20-year Treasury Inflation Protected Securities, or TIPS, on Jan. 26; $40 billion in two-year notes on Jan. 27; and $30 billion in five-year notes on Jan. 29.

‘Most Challenging Thing’

The government will likely sell $66 billion in three-, 10-, and 30-year securities next month in the Treasury’s quarterly refunding, equal to an estimated $62.5 billion in 10-year duration equivalents, according to David Ader, head of U.S. interest-rate strategy at Greenwich, Connecticut-based RBS Greenwich Capital Markets, another primary dealer.

“We’re facing the largest sale of 10-year equivalents ever with the refundings ahead,” Ader said. “Supply is going to be the most challenging thing we’ll have to deal with.”

Concern that supply will burgeon caused shorter-term securities to outperform longer-term notes and bonds this week. The difference between the yields on two- and 10-year notes grew by 21 basis points to 1.81 percentage points, the widest it has been since the week ended Dec. 12. The broadening came even as investors expected the gap to narrow with the prospect of the Fed buying longer-term U.S. debt, which policy makers have said they may do if long-term yields rise too much.

Selling ‘Overdone’

While this week’s sell-off was attributed to the large amount of supply expected, the rise in yields was “overdone,” according to Michael Pond, interest rate strategist at primary dealer Barclays Capital Inc. in New York.

“We are approaching the refunding period where we will get long-dated issuance, so its not surprising that it is weighing on investors’ minds,” Pond said. “Regardless, the economy remains weak and we do expect rates to remain low.”

Ten-year rates will fall to 2.42 percent by March 31, according to the median forecast of 62 economists in a Bloomberg survey. The 30-year yield will fall to 2.98 percent by the end of March, according to economists’ forecasts.

Yields also rose this week after Timothy Geithner, Obama’s pick for Treasury secretary, charged China is “manipulating” its currency, fueling concern foreign demand for U.S. debt may ease. A Chinese commerce ministry spokesman who couldn’t be identified under ministry rules responded yesterday, saying the country hasn’t manipulated the currency’s value.

Inflation Expectations

Thirty-year bonds have lost 9.3 percent this year as investors bet the government’s efforts to spur the economy by borrowing will ultimately lead to inflation, according to Merrill Lynch & Co.’s indexes.

“Historically, when we have seen supply and demand concerns arise it generally hits the long end more,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., another primary dealer. “It is concern about the long term and how will the Treasury be able to keep rates low with so much issuance, but there are also arguments that it feeds inflation.”

The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, widened to a nine-week high of 73 basis points.

The so-called real yield, or what investors get from 10- year notes after inflation, reached a 16-month high of 2.55 percent. Consumer prices rose 0.1 percent for all of 2008, after increasing 4.1 percent the previous year, Labor Department figures showed.

More Bond Education

There are two fundamental ways that you can profit from owning bonds: from the interest that bonds pay, and from any increase in the bond’s price.Many people who invest in bonds because they want a steady stream of income are surprised to learn that bond prices can fluctuate, just as they do with any security traded in the secondary market.

If you sell a bond before its maturity date, you may get more than its face value; you could also receive less if you must sell when bond prices are down. The closer the bond is to its maturity date, the closer to its face value the price is likely to be.

Though the ups and downs of the bond market are not usually as dramatic as the movements of the stock market, they still can have a significant impact on your overall return. If you’re considering investing in bonds, either directly or through a mutual fund or exchange-traded fund, it’s important to understand how bonds behave and what can affect your investment in them.

The price yield see-saw and interest rates

Just as a bond’s price can fluctuate, so can its yield - its overall percentage rate of return on your investment at any given time. A typical bond’s coupon rate, the annual interest rate it pays, is fixed. However, the yield isn’t, because the yield percentage depends not only on a bond’s coupon rate but also on changes in its price.

Both bond prices and yields go up and down, but there’s an important rule to remember about the relationship between the two - they move in opposite directions, much like a see-saw. When a bond’s price goes up, its yield goes down, even though the coupon rate hasn’t changed. The opposite is true as well: When a bond’s price drops, its yield goes up.

That’s true not only for individual bonds but also the bond market as a whole. When bond prices rise, yields in general fall, and vice-versa.

What moves the see-saw?

In some cases, a bond’s price is affected by something that is unique to its issuer - for example, a change in the bond’s rating. However, other factors have an impact on all bonds. The twin factors that affect a bond’s price are inflation and changing interest rates. A rise in either will tend to cause bond prices to drop. Inflation and interest rates behave similarly to bond yields, moving in the opposite direction from bond prices.

If inflation means higher prices, why do bond prices drop?

The answer has to do with the relative value of the interest that a specific bond pays. Rising prices over time reduce the purchasing power of each interest payment a bond makes. Let’s say a five-year bond pays $400 every six months. Inflation means that $400 will buy less five years from now. When investors worry that a bond’s yield won’t keep up with the rising costs of inflation, the price of the bond drops because there is less investor demand for it.

Why watch the Fed?

Inflation also affects interest rates. If you’ve heard a news commentator talk about the Federal Reserve Board raising or lowering interest rates, you may not have paid much attention unless you were about to buy a house or take out a loan. However, the Fed’s decisions on interest rates can also have an impact on the market value of your bonds.

The Fed takes an active role in trying to prevent inflation from spiraling out of control. When the Fed gets concerned that the rate of inflation is rising, it may decide to raise interest rates. Why? To try to slow the economy by making it more expensive to borrow money. For example, when interest rates on mortgages go up, fewer people can afford to buy homes. That tends to dampen the housing market, which in turn can affect the economy.

When the Fed raises its target interest rate, other interest rates and bond yields typically rise as well. That’s because bond issuers must pay a competitive interest rate to get people to buy their bonds. New bonds paying higher interest rates mean existing bonds with lower rates are less valuable. Prices of existing bonds fall.

That’s why bond prices can drop even though the economy may be growing. An overheated economy can lead to inflation, and investors begin to worry that the Fed may have to raise interest rates, which would hurt bond prices even though yields are higher.

Falling interest rates: good news, bad news

Just the opposite happens when interest rates are falling. When rates are dropping, bonds issued today will typically pay a lower interest rate than similar bonds issued when rates were higher. Those older bonds with higher yields become more valuable to investors, who are willing to pay a higher price to get that greater income stream. As a result, prices for existing bonds with higher interest rates tend to rise.

Example: Jane buys a newly issued 10-year corporate bond that has a four percent coupon rate - that is, its annual payments equal four percent of the bond’s principal. Three years later, she wants to sell the bond. However, interest rates have risen; corporate bonds being issued now are paying interest rates of six percent. As a result, investors won’t pay Jane as much for her bond, since they could buy a newer bond that would pay them more interest. Later, if interest rates begin to fall, the value of Jane’s bond would rise again - especially if interest rates fall below four percent.

When interest rates begin to drop, it’s often because the Fed believes the economy has begun to slow. That may or may not be good for bonds. The good news: Bond prices may go up. However, a slowing economy also increases the chance that some borrowers may default on their bonds. Also, when interest rates fall, some bond issuers may redeem existing debt and issue new bonds at a lower interest rate, just as you might refinance a mortgage. If you plan to reinvest any of your bond income, it may be a challenge to generate the same amount of income without adjusting your investment strategy.

All bond investments are not alike

Inflation and interest rate changes don’t affect all bonds equally. Under normal conditions, short-term interest rates may feel the effects of any Fed action almost immediately, but longer-term bonds likely will see the greatest price changes.

Also, a bond mutual fund may be affected somewhat differently than an individual bond. For example, a bond fund’s manager may be able to alter the fund’s holdings to minimize the impact of rate changes. Your financial professional may do something similar if you hold individual bonds.

Focus on your goals, not on interest rates alone

Though it’s useful to understand generally how bond prices are influenced by interest rates and inflation, it probably doesn’t make sense to obsess over what the Fed’s next decision will be. Interest rate cycles tend to occur over months and even years. Also, the relationship between interest rates, inflation, and bond prices is complex, and can be affected by factors other than the ones outlined here.

Your bond investments need to be tailored to your individual financial goals, and take into account your other investments. A financial professional can help you design your portfolio to accommodate changing economic circumstances.

Capital Market Briefing - 23rd Jan

2009-01-23T19:40:00.000-08:00

Headline News:
- December Housing starts below expected 605000. Actual 550,000. Lowest since 1959 (since recording started). Building Permits also drop to 549K vs estimate of 600K. Jobless claims rise to 589K as of the week end of 17th Jan. (Commerce Department)

- General Electric Earnings: GE Net earnings down 44% (in line with expectations). Warns of slowdown. Cancelled orders for big equipment is a concern. GE Capital is the biggest looser. GE energy does well. 50% mgmt incentives now based on cash flow generation. Might need to cut dividends or risk loosing AAA rating.S&P downgrades AAA rating to negative from stable (1 in 3 chance of downgrade).

- Sony Earnings:

- Australia Stimulus

- Japan long term bonds

- Treasury Yields Beginning to Rise/Prices falling on Supply Concerns. Undoing the effect of lower int rates?

Goldman Sachs Group Inc. on Jan. 22 raised its 2009 Treasury borrowing estimate to $2.5 trillion. The firm estimated the deficit this year at $1.4 trillion.

The Treasury will auction $8 billion in 20-year Treasury Inflation Protected Securities, or TIPS, on Jan. 26; $40 billion in two-year notes on Jan. 27; and $30 billion in five-year notes on Jan. 29.

The benchmark 10-year note yield, used to set corporate borrowing costs and mortgage rates

Yield Curve:

Spreads:

Key Rates:

Equities:

Options:

Prediction for next week:

Tech Analyis-Jan09

2009-01-17T09:34:00.000-08:00

The weekly time frame is your bigger-picture chart. When scouting chart patterns, this should be your time frame of choice. It's easier to see past formations as well as those in development. Use the weekly chart to gauge the soundness of the pattern. Bases should be fairly tight rather than wide and loose. With the weekly chart, you can more easily see if a stock meets the minimum time requirement for a particular base. Remember, most patterns need at least seven weeks to form.

After a stock clears a proper buy point, look at its volume. It should be at least 50% above its average on a breakout.

Switch between weekly and daily charts to see long term and short term patterns. Oil and gas producer Continental Resources (CLR) went public in May 2007 at 15 a share. On July 17, the stock hit a high of 18.39 1 then started to form its first base.
By late September the stock was shaping a cup base, giving a buy point of 18.49, or 10 cents above the July high as seen on a weekly chart.
But switch to a daily view and you'll find a six-day handle 2 with a lower buy point at 18.30.
Continental cleared the handle Sept. 27 in more than twice its average volume 3. By early January 2008, it had surged more than 50%.

On radar

2008-10-19T01:26:00.000-07:00

High Dividend Yielders:
- MRK (Merck..Cramer recommended)..has double cash than debt has 5.3% yield. Has long history of dividends.
- I bought BMY..competitor of MRK..has double debt than cash but 7% yield
- Phillip Morris and Altria (MO)?
- GE: buffet bought stake. I have bought 100 shares by sellin $20 puts. ~6% yield.
- UTX (United technolgoies) - Cramer recommends. they raised dividends by 20% last week..that's an incredible move..they have been raising dividendds for last 15 years I guess..the CEO came on mad money...some 3.4 % yield.
- EER (Emerson) - 4.1% yield..53 years of dividend payments..great industrial play...cramer 11/11

Market Indices
- EEV: Ultrashort Emerging Markets
- SRS: Ultrashort real estate
- QID: Ultrashort Nasdaq 100
- DUG: Ultrashort Oil and Gas
- SPY: S&P 500 SPYDRs
- SDS: Ultrashort S&P 500

Oil Services and Refining Companies
COP - 3.6% yield and ex dividend date on 29th October.
NAT - 20% yield at least now..tanker company..Cramer recommended on 11/11. Dividend record 21st Nov.

Technology:
IBM - 2.2 yield and hasn't been baten down that much...very resilient..
AAPL:
GOOG:

Finance
GS

Back

2008-10-19T01:14:00.000-07:00

SO much has happened since I wrote here last..market has crashed in a crazy fashion. And it has affected everyone..almost everyone! Oct 1 to Oct 10, Dow crashed by 2400 points or 2400/10800 = 22%!!. Lehmann Brothers going bankrupt really started this downfall. LEH went down as nobody agreed to buy (Fed couldn't force a deal like they did with Bear Stearns). Merryl Lynch followed and was swallowed by Bank of America. Goldman Sachs and Morgan Stanley, the only 2 surviving investment banks of the golden american financials era, became bank holding companies. Meaning they could now accept deposits like commercial banks. The regulation era is back...

Recipe for Poverty: Investing in market indices!

2008-06-03T14:34:00.000-07:00

Everyone's heard of passive investing. If you just invest in a market index fund and let it ride, you will beat several active investors. A staggering 70-80% money managers can not beat the index (such as S&P 500, DJIA). This is what legendary investors like Peter Lynch, John Bogle also preached and practiced. They apprently did well. But something does not feel right. Here's a proof:

The chart shows S&P 500 index plotted over a 12 year time frame from 63 to 75 where investor basically didn't make a dime. If you invested in let's say SPY (S&P 500 index derivative) in 1963 and had a need to take your money out in 1975, your net return would be a big ZERO %.

Now 12 years is a very long time frame for anyone to get 0% return in a supposedly risky investoment like stocks (even if it is an index). This umbrella pattern (new term alert..Owner: moi) also repeats over medium term horizons like 4-5 years (chart below is S&P returns from 1997 to 2003).

Proponents of market indexing would rush and show you a similar chart from 1950 to 2008 where S&P shows a very healthy return that averages 7.2% annually.

Ok good. But man, I got no patience to wait 50+ years. And this then means only young investors should invest in a market index. Even then, there are life events that might force you to withdraw your money. So market indexing seems like a rip off at best. I would say 10-15 years is what the definition of long term should be. Anything above that is pretty boring in this age of instant gratification. In fact 10 years itself is pretty long in this CNBC era where new HOT stocks tips emerge every other minute.

So did Bogle and Lynch lie? Not really. That's probably why they recommended a diversified portfolio of index funds. It is still active investing albeit in a passive instrument. You still need to do the due diligence of picking appropriate market sectors for the current business cycle and then pick index funds (ETFs are pretty good for this) for those market sectors. And that's why they also teach you importance of rebalancing. When a phrama sector goes out of favor at the bottom of business cycle, you do not buy pharma ETFs. Here's a good business cycle and favorable sector map (Courtesy: Blog: Three Cents).

e.g. Pharma (# 3) is a poor sector at the Top. Financials (like now in 2008) is a good sector to invest in an early bull cycle.

So today in June -08, can you go and start buying Citi, JPMC, Merill right away? May be not. The issue is you don't know if this is the bottom and hence beginning of "Early bull" on the chart. Also, you are not sure who is headed the Bear Stearns way. Well, this is where Bogle's advice helps. For an average investor, best bet would be to start investing in an index of the financials (XLF). Start buying at dips and accumulating a core position to get ready for the upcoming upturn. There's always one coming! :)

Overall, market indexing is a rip off. Picking individual sector indices and timing the entry and exit according to business cycle above seems like a decent, at least not shoot yourself in the foot, strategy.

Value Investing

2008-06-03T14:29:00.000-07:00

Graham, Buffet, Tweedy Brown and so many have practiced value investing for years and have done exceedingly well. So why doesn't everyone just copy it. Because, human beings naturally are born speculators. Gambling is probably in our blood. Stocks bring out that spinstinct (my own term: Speculative Instinct) very effectively. Hence most of the world becomes a momentum investor. Very few have the emotional discipline to stay in the game for the long term. Investing, more so than many things in the world, boils down to emotional discipline.

Cramerica

2008-04-15T23:54:00.000-07:00

He may not always be right and may not be the sterotype "street" trader...but you learn from him: Jim Cramer:

1) PEG ratio between 1 and 2: good opportunity.
2) Dividend history: If stable growth in dividend % good sign. But sudden rise/fall in dividends - worrysome sign.
3) Insider Buying:
High Insider Buying + High Insider Shorts = good sign. Lot of insiders know upside potential. So they are selling high(short) and waiting to buy low.
High insider buying + Stock on latest new highs list = insiders buying despite highs is a gr8 sign.
High insider buying = by itself does not mean anything.
4) Stock on new High list: Wait for pullback and then get in if the stock is a good and safe company. Cramer believes that stocks continue the direction they are headed most of the times. (I don't buy that completely).
5) Trading Stocks: defensive way to make money.
Trading around a core position: works in volatile markets but can follow any time. Then buy one increment if stock goes Y amount down and sell one increment when goes same Y amount up. You do this over a period of time. This means trading around a core position although sounds boring. Cramer made ton of money by this!
6) Hot Stocks: small company(low market cap + high growth) stock...if there are at least 4 analysts covering, then stock run is done. This formula has worked!

Stock Options

2008-04-10T20:37:00.000-07:00

Everyone is scared off Stock Options. They are supposed to be very risky and very complicated. That's true actually. But if you have some patience to read through the nomenclature and have some risk appetite, then options could be financially rewarding.

Selling Puts: Someone else can "Put" a stock into your account at the strike price. (Bullish..discount for stock buying)

Selling Calls: Someone else can "call" stock from your account forcibly. (Bearish..income source and tax puts)

Buying Calls: You buy right to own a stock (Bullish...)

Buying Puts: You buy right to sell a stock. (Bearish...insurance/protection)

Selling Puts to Own the Stock
1) Do your stock research first. Pick a good stock you would want to own.

2) Once you decide which stock to own, go to yahoo finance and look at the Option chain for that stock. Look at Puts.

3) Look at the current trading price of the stock and then the puts for that price.

4) Sell puts few contracts (depending on how much you can buy of that stock), each contract = 100 shares. Strike price you pick could be

a) Such that Strike - premium <>
b) If you don't want to own the stock right away, then pick Strike price - Premium <<<>

5) If you want to own the stock immly, pick immediate expiration, if not pick at least 6 months apart.

6) If you think stock could get hammered, buy some puts as insurance.

7) If put expires and does not get exercised, then you must decide if you want to sell another put or you want to directly buy the stock.

Once you own the stock: (at least 100 shares): Sell Calls to sell stock:

1) Start selling some calls to make monthly income.

2) Sell calls such that...Strike Price - Premium > Your stock purchase price.

3) If you want to sell immediately(don't want the call to be exercised), then you can choose Strike Price = your purchase price or even Strike - Premium = your purchase price. (no profit)

4) If you don't want to sell the stock immly, then select call such that Strike - Premium >>>>>your purchase price.

5) If you pick long expiration, then you may not be able to get monthly income. you might get a big lump sum once. That should depend on stock volatility. If stock trades within a small range (highly volatile) then you might want to sell calls monthly to make regular smooth income vs one time.

Risks:

Selling Puts: If underlying stock goes down, probability of exercise goes up. Hence if you don't want to own the stock, this is a risky strategy. Also, if you pick too high a strike price, you might own the stock for a much higher price that current price.

Selling Calls: If underlying stock goes up, value of the call goes down and probability of exercise goes up. If you don't already own the underlying stock, you could get in big trouble. One should always sell Covered Calls.

Watch List

2008-03-31T11:27:00.000-07:00

High Dividend Appreciation Firms: AT&T Johnson and Johnson All State(?) Norfolk Southern? Bank of America, Nike, ConocoPhilips, Eli Lilly,Paychex, Avon Products
Other Watch Lists: Disney Verizon Apple Costco

Long Term vs Short Term Investing

2008-03-30T09:36:00.001-07:00

Peter L Bernstein: Long term returns are more uncertain than short term despite the conventional wisdom that short term returns are more volatile.
e.g.$100 invested today could become $90 or $110 in 1 year if we say that 1 year time frame is very volatile and could produce returns from -10% to 10% (high std deviation). Now same $100 over a longer 15 year term could produce $207 for 5% returns and $417 for 10% returns. Thus long term, despite having small standard deviation compared to short term, results in a much larger "spread" in total $ returns. (20% spread in ST vs 200% in LT).
Now What?: To bring down the uncertainty over long term, focus on not only "stock price appreciation" but also on "income appreciation (dividends)". Dividends greatly reduce the uncertainty over long term.
e.g. $100 invested in a dividend paying stock in 1925 ,which let's assume had 0 price appreciation, would have produced higher annual returns upto 1965 (!!!!) compared to a high growth no dividend stock. Only after 1965, Price appreciation would take over Income appreciation!
So: morale of the story is, long term returns is a relative term depending on your time horizon. Whatever be the horizon, focusing on stocks that can pay you steadytream of dividends will help reduce the uncertainty invovled.
And: Another key point is, dividend yield will keep going up for you with every passing year.
e.g. if GE pays 5% dividend every year, then $100 invested today become $105 next year. Let's say stock appreciated to $105 at5% growth. Next year GE dividend will be 5% of $105, the then stock price. Your dividend yield is still based off of $100 you invested and hence is 10.25% next year (1.05*$105 = $110.25)! Think about this over a 10 year, 20 year time frame. The dividend yield appreciation combined with moderate price appreciation is a winning combination. One might think this is similar to a compound interest in a bank account. But no. In a bank account your base will remain $100 forever unless you reinvest the interest you receive every year. In our example, we are not reinvesting the $5 dividend we received in year 1. It's the price appreciation that really does the trick which in a bank account would never happen. The underlying asset of $100 will remain $100 if the interest is not reinvested.

Most recycled material

2008-03-27T22:33:00.000-07:00

Steel is more recycled than 4 times (glass+plastic+ aluminum)! ...Surprising ha? But Steel stocks get dumped every time there is sign of recession. Besides, emerging coutnries dump a lot of cheap steel in US.

Pearls of Wisdom

2008-03-26T23:24:00.001-07:00

Warren Buffet (Oracle of Omaha): Don't pay too much for any stock. P/E ratio, P/B ratio and ROE are critical indicators for Buffet. We pay for businesses we feel good about owning by tracking management performance and business performance over a long 5 -10 year horizon.
Jim Rogers: He invested in countries! Went against the tide and invested in Lebanon and made a killing. He suggested to carefully listen to media and TV. He suggests tricks to spot tops and bottoms. Tops: trees will keep growing up and up. Bottoms: media declaring 'stocks are dead'. Fortunes can be made by timing these tops and bottoms but it can be done. Note that all large bottoms and tops are alike. Look in history and you will see very similar patterns. At bottoms, many who have been in business for a long time will leave or diversify. At tops, companies with no experience will also crowd in. The key is not to be a market genius but a market observer and thinker.
Peter Lynch (Fidelity): Buy things close to your home. The edge you get from buying companies you know (such as company where you work, who you do daily business with, who your kids love eating at etc) is much higher than even most informed stock market investors. Lynch bought things like Taco Bell, ADP etc. He seemed to stay away from tech stocks. He ran the famous Fidelity Magellan fund.
John Bogle (Vanguard): Active investing is a fool's play. Use market indices to play the market. Use various sector indexes for diversification. Active investing
One more wise guy:
Stock market has ups and downs because investors exhibit irrational exhuberance (Alan Greenspan's term) on the way up and down. That's why if you play a contrarian...when market and everyone is saying up ..up and above, you start selling...when everyone is saying this is the worst market, don't get in ...you start buying. "If you want to be with the crowd, you need to be cautious. If you are going against it, you need to be bold". Learning to analyze market opinion from TV and Newspaper news and then taking an opposite view has worked great for him.
Henry Markovitz : Markets are efficient and every investor should try to buy portfolio on the efficient frontier which is consistent with his risk levels. It pays to follow mean variance optimized (MVO) portfolios.

Bear Market Over??

2008-03-24T20:38:00.001-07:00

At Least Cramer thinks so....as of 24th March!

Key Redings

2008-03-22T23:52:00.001-07:00

Investor's Business daily: good stock analysis although more focused on technical analysis.
Blog: Three Cents , Hingefire

Spotting Stock Bottoms and Tops

2008-03-22T23:27:00.001-07:00

Taking a leaf out of Jim Cramer's book:

Spotting Stock Tops (time to sell):

Every analyst has buy rating on the stock. Somebody has to be able to bring the bearish sentiment. Let that be you.
When you feel you have made a lot of money in a stock and it has had a great rally, get circumspect and think of the top. No stock would keep going on and on in the upward direction. Very few analysts on street talk about tops...they don't want to. That's the behavioral bias...unrealistic optimism.
If you follow fundamental analysis and pick a stock with low PE and that stock rallies up and goes to become a high PE, may be it's time not to keep holding but to get off - at least some.
Monitor the entire sector and watch out for Competition. Competition can come from anywhere and can destroy stocks. People like Cramer spend an hour studying competition every week.
Accounting irregularities = Sell ....no matter what...no exceptions! Numbers are fraud..(option backdating is a compensation issue not an accounting issue..option backdating might be a sign to buy actually)
Overexpansion: acquisitions, too many store openings, too much growth that can't be managed. (key word: "Integration Problems")
Government Intervention

Spotting a bottom

market sentiment must be bad. Front page of NYTime (right top corner) has mail letters from people talking all negative.
Wendesdays - investor's intelligent survey of money managers. If there are too many bears there.
Mutual funds pulling out of market in a significant way
Big bottoms have a catalyst usually ..market sentiment in gutter....you get some bad news in the market that has widespread effect on market. (e.g days before Iraq war..uncertainty is not good for investors and hence market reaches a bottom)

Spotting Sector Rotations

Cyclical: Airlines, Auto, Raw Materials, Consumer Durables (washing machines),

Secular: utlities such as P&G and General Mills

When economy is growing, buy seculars and sell cyclicals. When economy is in gutter, buy cyclcial and sell seculars.

Earnings Revisions

Spot earnings revisions by analysts before they do. Read the news...follow suppliers. If Intel's doing well, AMAT should be expected to do well.