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The Simple Accountant  

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  • The Bond Message Gets Louder [View article]
    Yep, and in the markets, timing matters. The old bull will die one day - just don't order the flowers yet.
    Aug 10, 2012. 10:21 AM | Likes Like |Link to Comment
  • The Bond Message Gets Louder [View article]
    It seems to me that a couple of things are happening here:

    1. Bonds were way overbought and yields stretched to the downside, and the market is simply in the process of working off the excess

    2. There may have been some front-running of anticipated Fed and/or ECB QE, which is showing up in the commodity bounce

    My take is that the death of the bond bull is greatly exaggerated, and the commodity bounce is just that. The TBT has been a portfolio killer for some time now - maybe good for an occasional trade but as a longer term holding? No way.
    Aug 10, 2012. 10:02 AM | 4 Likes Like |Link to Comment
  • The Death Of Equities? Hardly, Mr. Gross [View article]
    There is ample research to support the idea that the preponderance of stock market returns is based on multiple expansion/contraction, not GDP or earnings growth. This is the answer to previous comments that ask whether, given a long term GDP growth rate of 3.5%, earnings growth and stock market returns shouldn't both be a similar figure.

    While that proposition may hold over very long periods, there is quite a bit of variance over shorter cycles. That is where investors make - or lose - their money. Mr. Gross' comments seem to me to be an expression of pessimism regarding multiple expansion - essentially investor risk appetite - over some forward period. My own take is that, twelve years into a secular bear market, we are in the "later innings" already.

    The commentary also seems odd given that his firm, PIMCO, is increasingly getting into equity fund management. Presumably there are other managers at PIMCO whose outlook for equities might be more sanguine.
    Aug 3, 2012. 08:19 AM | 3 Likes Like |Link to Comment
  • Earning Season: Where Is The Growth? [View article]
    Thanks to all for the comments. I am not generally bearish and have not been outright bearish on equities at any point since 2009, but I do think tactically, that we are likely to see another leg down this summer. The fundamentals just don't look that strong here.

    Longer term I am quite bullish on the U.S. economy and the U.S. dollar. @ Seth, I agree that energy positions will represent good long term value on a pullback.
    Jul 23, 2012. 07:32 PM | Likes Like |Link to Comment
  • Central Banks, Economic Data Weigh On Markets [View article]
    Thanks for the comment Million

    Your SPY put doesn't necessarily seem like a worrisome position. The overall environment this summer is choppy and the market can go either way. My take is that being long volatility probably isn't a bad idea. I'm not an options guy, and you should look for a better informed opinion, but some kind of spread here seems like an appropriate trading tactic.
    Jul 8, 2012. 11:02 AM | Likes Like |Link to Comment
  • Let's Not Get Too Excited Just Yet [View article]
    Thanks for your comment Jason

    That 25 year chart of the T-note yield is something I insert into my weekly articles from time to time, to add some longer term perspective to a week-to-week focus. The yield could get above 3% - a move that would stir a a great deal of attention and commentary in the financial press - and still not break this trend.
    Jul 8, 2012. 10:51 AM | Likes Like |Link to Comment
  • Can Europe Pull Germany From Fantasy Land? [View article]
    Let's set Germany and the PIIGs aside for a moment. Within a currency union, no nation can run a trade surplus in perpetuity; nor can any run deficits in perpetuity. It's a matter of simple math - a running current account imbalance will result in a capital account imbalance. The accounts must balance (one of the few things a simple accountant understands). Once the capital account imbalances become large enough, insolvency results.

    This fundamental principle holds whether it be Germany & the PIIGs within the EZ, or the U.S. & China with a tightly "managed" exchange rate (on the Chinese side).

    There are only three possible outcomes I can see here, none of them easy and none desirable:

    1. An orderly dissolution of the EZ in its current form. Something like a two tier system based on dispersion - perhaps a northern euro and a southern euro - might work. Any new Deutschemark or "northern euro" will appreciate massively, hurting competitiveness. The new Drachma, Lira, or "southern euro" will depreciate massively, helping competitiveness. Highly problematic, as assets and liabilities are denominated in the current euro.

    2. A political union, complete with centralized fiscal policy, internal labor mobility, unified banking supervision - effectively a loss of sovereignty for all EZ nations. Very difficult to achieve politically.

    3. Policy paralysis and market driven outcomes with numerous possibilities: unilateral exits from the currency union, widespread defaults, creditor haircuts etc. Bank, insurance and pension fund failures. Sales of state owned or controlled assets or, at the other extreme, nationalizations. Perhaps the easiest of the three because it is the "default" option (in both senses of the word), but the results would be chaotic and likely non-optimal.

    There is a fourth possibility which is too far out for me to envision: a turning of the zeitgeist, popular movements which throw out the current (largely failed) leadership and fundamentally change the rules of the game - something like what Syriza and Tsipras were representing in the recent Greek elections - but on a pan-European scale.

    It's quite a mess the Europeans have gotten themselves into, and they won't easily get out.
    Jun 28, 2012. 09:01 AM | 2 Likes Like |Link to Comment
  • Volatility Is Back [View article]
    Hi Happy,

    Not sure what to think about market manipulation. There is an explicit variety, in the form of liquidity infusions and suppression of interest rates; perhaps you are thinking of something...less visible?

    It doesn't seem to me that the economic fundamentals in the U.S. are very negative. Certainly it's not all bread and roses, and the data suggest we are going through a bit of a soft phase presently, but business conditions for the most part aren't terrible. To use John Mauldin's pet phrase, I suspect we will muddle through.
    Jun 26, 2012. 08:42 AM | Likes Like |Link to Comment
  • Volatility Is Back [View article]
    Thanks for the comments. You make a number of good points here. I get the sense that you are not particularly bearish? I am not bearish myself, just in wait and see mode. The macro outlook for slow (perhaps painfully slow) U.S. growth still seems valid to me.

    In that environment I do want to own quality stocks, but don't want to buy into a general down trend. As stated in the article: I think the market is going to throw us a fat pitch in some of the blue chip energy names. Along with tech stocks, that is the area I am watching for buy signals.
    Jun 26, 2012. 08:29 AM | Likes Like |Link to Comment
  • Volatility Is Back [View article]
    Hello Larry,

    You have helped me to realize I should be more clear: I am running two separate portfolios. One is focused on longer term capital appreciation. Comments about our positions in the stocks and commodities sections of my articles pertain to that portfolio only unless explicitly stated.

    The second is a current income portfolio. That is the one where we are holding HYG as our higher risk allocation. I really do like EMB, and would not have a problem owning it, but have chosen to go out even further on the risk spectrum to HYG with that slice of the portfolio. The remaining allocation is pretty conservative.

    To compare, EMB currently has a beta around .6 and yields under 5%, while HYG has a beta a little over 1 and yields over 7%. Higher risk, higher yield. EMB may yet find its way into the income portfolio as it is a fine satellite holding - to reiterate, I have nothing against it at all.
    Jun 26, 2012. 08:18 AM | Likes Like |Link to Comment
  • Support Broken, More Downside Ahead [View article]
    Fair point and good question Zenith, thanks for your comment. Agreed that a combination of HYG and EMB represents more than "a bit" of risk - as my reply to Larry indicated, that "is a quite a lot of risk for my income portfolio."

    My answer to your question is that the exit and trigger is going to be different for each investor's risk tolerances. I can tell you what mine are:

    The income portfolio has a strict preservation of capital mandate and a simple sell rule: exit a holding when current value falls below cost basis by more than the equivalent of one year's yield on the position. For now we're still well above our basis on all the open positions, but not committing any new money in this environment.

    In the appreciation portfolio there is no mechanical sell rule; the analysis is based on macro outlook and technical indicators. In actual practice I often close positions that fall 7-8% below cost (the William O'Neill guideline), unless there is a compelling case for holding.

    I am pretty conservative about entry points and tend to sit on cash, waiting for the "fat pitch," so it's not often we find ourselves underwater on a position. When it does happen, we'll get out. There's always another trade.
    Jun 5, 2012. 11:59 AM | 1 Like Like |Link to Comment
  • Support Broken, More Downside Ahead [View article]
    I see we hold several of the same funds. We're also using leveraged CEFs quite extensively, in both the income and appreciation portfolios. The Fed has told us very plainly that short term rates will remain pinned to the floor for a long time, so the strategy of borrowing short and lending long is presently a sound one.

    Just remember what happens to leverage when liquidity dries up in a crisis - go back and look at some of these funds' charts in 2008. We were sitting on a pile of cash at the time and were able to buy some closed end muni CEFs at fire sale prices in December of that year.
    Jun 5, 2012. 09:02 AM | Likes Like |Link to Comment
  • Support Broken, More Downside Ahead [View article]
    Very good question - are we (the U.S. and the world) turning Japanese?

    Not sure I have a good answer, but there are some similarities: collapse of a debt fueled private asset bubble, government sector taking on debt as private sector de-leverages, low interest rates unable to stimulate enough demand to generate growth, "zombie" banks, aging population, etc.

    What is your take?
    Jun 5, 2012. 08:55 AM | Likes Like |Link to Comment
  • Support Broken, More Downside Ahead [View article]
    Thanks for your comments Larry

    I do like the yield on EMB, while recognizing that it is a bit risky. Holding both EMB and HYG is a quite a lot of risk for my income portfolio, which is a real life retiree's current income portfolio. The largest allocation by country is to Brazil, and Russia is sixth. I have concerns about both countries in an environment of falling oil prices.

    XLU is a nice option as well, but it is after all composed entirely of common stock. If things get really ugly, it may not prove to be such a safe haven. It was trashed right along with everything else in 2008.

    Given these concerns, I realize that we have to get yield somewhere, and this is something I grapple with every day. We have really moved out of our traditional comfort zone in search of yield, as I suspect you and many other income investors have. That's fine as long as we understand the risk and have an exit strategy should conditions deteriorate.

    With regard to UUP, it just doesn't move much. I suspect there are better ways to play the currency movements if you are so inclined, but that is not my area of expertise, so I would suggest seeking a more informed opinion than mine.
    Jun 4, 2012. 09:37 PM | Likes Like |Link to Comment
  • Market Pessimism Is Overdone [View article]
    That is quite an important observation, and a point I have made repeatedly, as my article place a good deal of emphasis on the dollar. The inverse dollar/risk asset correlation - and the positive euro/risk asset correlation - is a characteristic of this particular market cycle. It has not always been the case and will not always be the case in future.

    One of the signals of a major turn and new longer term market cycle, I suspect, will be for these currency/risk asset correlations to break down and even reverse. I have been watching for this for some time, and have not seen such a turn to this point. It will eventually happen, and I will be sure to publish my view when I see it.
    May 24, 2012. 08:06 AM | Likes Like |Link to Comment