Econ Base's Instablog Global political and economic events influence financial markets over the long term. The downturn of March 2009 should convince everyone that professional money managers cannot do the job for you. You have to do it yourself. In my blog I will share any new positions towards a "portfolio for life". An engineer by profession, I have enjoyed managing my own money for over 25 years. I also have an MBA degree. Econ Base http://seekingalpha.com The case for GNMA's for fixed income http://seekingalpha.com/instablog/198688-econ-base/22690-the-case-for-gnma-s-for-fixed-income?source=feed 22690 Bonds, GNMA vs. DJI for 52 weeks
Recap of the 2 major downturns:
 

In the past 52 week period, we went through 2 major fear periods causing stock market corrections: 1st was in November 2008 when Dow Jones Industrial Index (DJI) went to 8000 range and the second one even more severe in early March 2009, when the DJI went into the 6000 range! As I wrote earlier, everything sold off including bonds.


Correlating fixed income vs. stocks:
 

I have plotted DJI as a proxy for the stock market vs a number of ETF's or mutual funds as proxies of the fixed income intruments: VFIIX (Vanguard GNMA), BSV (Short Term Bond), BLV (Long Term Bond), BIV (Intermediate Bonds), BND (Total Bonds), TIP (Inflation Protected Bonds), PEMDX (PIMCO Emerging Market Bonds) and PHIYX (PIMCO High Yield Bond, aka US Junk Bonds). I wanted to see the correlation of the fixed income market versus the stock market in the 2 fear periods and the subsequent bull market since March lows.


Observations and the case for GNMA's:
 

1. The highest correlation was of the Emerging Market Bonds and the US Junk Bonds. This shows the Emerging markets are not as decoupled to the US as people make out to be. Also not surprising is that the corporate junk bonds fell in value. As confidence in a company drops, its stock drops and so does its bonds.

2. All the other Bonds (with GNMA's showing lowest correlation), fell during the October-November 2008 fear period. The stock market kept dropping every day. Once stocks sold off sharply in November, people started running towards safety, buying back US treasury bonds in December perhaps creating a bubble in the treasury bonds.
 
3. The second fear period of March 2009 showed bonds selling off, but not quite as much as fall 2008. This may be due to the fact that the Fed had started buying treasury bonds. In other words the US government was printing dollars to keep the bond market steady. It succeeded.
 

4. GNMA's did not sell off. In fact they are up 5% in price over the last 52 week period. The Vanguard GNMA VFIIX is also yielding a healthy 4.61%. This is the biggest revelation. GNMA's do not fluctuate to interest rate changes nearly like other bonds. They depend upon the mortgage rates of the underlying paper. Consequently they provide a steadier return than bonds. More importantly there is no default risk, as the underlying paper is guaranteed by the government.

Disclosure: hold position in GNMA and other fixed income instruments mentioned
]]> Thu, 13 Aug 2009 22:07:04 -0400 Bonds, GNMA vs. DJI for 52 weeks
Recap of the 2 major downturns:
 

In the past 52 week period, we went through 2 major fear periods causing stock market corrections: 1st was in November 2008 when Dow Jones Industrial Index (DJI) went to 8000 range and the second one even more severe in early March 2009, when the DJI went into the 6000 range! As I wrote earlier, everything sold off including bonds.


Correlating fixed income vs. stocks:
 

I have plotted DJI as a proxy for the stock market vs a number of ETF's or mutual funds as proxies of the fixed income intruments: VFIIX (Vanguard GNMA), BSV (Short Term Bond), BLV (Long Term Bond), BIV (Intermediate Bonds), BND (Total Bonds), TIP (Inflation Protected Bonds), PEMDX (PIMCO Emerging Market Bonds) and PHIYX (PIMCO High Yield Bond, aka US Junk Bonds). I wanted to see the correlation of the fixed income market versus the stock market in the 2 fear periods and the subsequent bull market since March lows.


Observations and the case for GNMA's:
 

1. The highest correlation was of the Emerging Market Bonds and the US Junk Bonds. This shows the Emerging markets are not as decoupled to the US as people make out to be. Also not surprising is that the corporate junk bonds fell in value. As confidence in a company drops, its stock drops and so does its bonds.

2. All the other Bonds (with GNMA's showing lowest correlation), fell during the October-November 2008 fear period. The stock market kept dropping every day. Once stocks sold off sharply in November, people started running towards safety, buying back US treasury bonds in December perhaps creating a bubble in the treasury bonds.
 
3. The second fear period of March 2009 showed bonds selling off, but not quite as much as fall 2008. This may be due to the fact that the Fed had started buying treasury bonds. In other words the US government was printing dollars to keep the bond market steady. It succeeded.
 

4. GNMA's did not sell off. In fact they are up 5% in price over the last 52 week period. The Vanguard GNMA VFIIX is also yielding a healthy 4.61%. This is the biggest revelation. GNMA's do not fluctuate to interest rate changes nearly like other bonds. They depend upon the mortgage rates of the underlying paper. Consequently they provide a steadier return than bonds. More importantly there is no default risk, as the underlying paper is guaranteed by the government.

Disclosure: hold position in GNMA and other fixed income instruments mentioned
]]> BSV PEMDX PHIYX BLV BND TIP VFIIX As Fear rises, Cash continues to be king http://seekingalpha.com/instablog/198688-econ-base/11553-as-fear-rises-cash-continues-to-be-king?source=feed 11553 An unemployment report this week was perceived to be bad. Fear rose in the markets all of a sudden. The bulls who rang the markets up with the green shoots theory were perhaps hiding this week. I still do not understand why the markets rose from March until recently. If you have been reading the news, the economic recovery is always 6 months to a year away. Maybe the bulls are getting some sense knocked into them and the DJIA closed down this week at ~8280, S&P500 at ~896. Dollar closed strong against most major currencies enabling the 30yr. bond to also close strong, with the yield down to 4.32%. As the dollar strengthened gold/platinum weakened somewhat at ~932/1191 per oz. respectively.

It would be best to stay on the sidelines without making any major moves. Cash is king for now. The emerging market stock indices of China/India stay strong, but remains to be seen for how long. The lesson learned from the 2008 "Total Liquidation" was that the emerging markets were not as independent from the US as once thought. As US markets fell, so did the other markets. Nothing has fundamentally changed since then. So if the earning season dissapoints the bulls further and US markets go down further, China/India/Brazil etc. will also follow down as fear takes over. Good luck.

]]> Sat, 04 Jul 2009 20:48:26 -0400 An unemployment report this week was perceived to be bad. Fear rose in the markets all of a sudden. The bulls who rang the markets up with the green shoots theory were perhaps hiding this week. I still do not understand why the markets rose from March until recently. If you have been reading the news, the economic recovery is always 6 months to a year away. Maybe the bulls are getting some sense knocked into them and the DJIA closed down this week at ~8280, S&P500 at ~896. Dollar closed strong against most major currencies enabling the 30yr. bond to also close strong, with the yield down to 4.32%. As the dollar strengthened gold/platinum weakened somewhat at ~932/1191 per oz. respectively.

It would be best to stay on the sidelines without making any major moves. Cash is king for now. The emerging market stock indices of China/India stay strong, but remains to be seen for how long. The lesson learned from the 2008 "Total Liquidation" was that the emerging markets were not as independent from the US as once thought. As US markets fell, so did the other markets. Nothing has fundamentally changed since then. So if the earning season dissapoints the bulls further and US markets go down further, China/India/Brazil etc. will also follow down as fear takes over. Good luck.

]]> 30 year bond CD emerging markets Gold