Sunday, March 27, 2011

Sell US Treasury Bond Fund

The main purpose for this e-newsletter is to let you know that it is time to make an investment change which is to sell bond funds associated with the US Treasury. For the clients who own this fund it is time to make a change. This will be discussed in some detail in the middle section. The first section is from Vanguard. The final section is on the use of wasp spray for personal protection.

Vanguard

In a week that was light on new data, a revised estimate showed the U.S. economy grew 3.1% in the fourth quarter of 2010, a bit higher than the previous estimate of 2.8% released last month. On a more downbeat note, sales of new and existing homes declined sharply. For the week ended March 25, the S&P 500 Index rose 2.7% to 1,314 (for a year-to-date total return—including price change plus dividends—of about 4.9%). The yield of the 10-year U.S. Treasury note rose 18 basis points to 3.46% (for a year-to-date increase of 16 basis points).

Sell US Treasury Mutual Fund

The performance of this type of fund is inversely related to the longer term interest rates so that as these interest rates go up the performance of this fund goes down. These longer term interest rates have been suppressed by the Federal Reserve purchasing of US Treasury bonds called Quantitative Easing or QE 1 and 2. By making these purchases the Federal Reserve increased demand and lowered the interest rates so that businesses would be more attracted to borrow money and stimulate the economy.

The Federal Reserve has been successful in their goal and the economy is recovering. Also, the Federal Reserve has stated that this program will end on time at the end of May 2011. As the Federal Reserve stops making these purchases interest rates will rise. Eventually, the Federal Reserve will sell these bonds which will raise interest rates even more. With higher interest rates coming fairly quickly, it is time to make a change before QE 2 ends.

Three options exist: buy a money market fund, buy a corporate bond fund, or buy a stock fund. If a client wants to become more conservative and take less risk it is time to buy a money market fund. If a client wants to maintain their current risk level then it is time to buy a corporate bond fund. Lastly, if a client wants to take on a higher amount of risk then it is time to buy a stock fund.

Also, if you have a home mortgage with an interest rate over 5% now would be a great time to consider re-financing to a lower interest rate. Home mortgage interest rates will increase as longer term US Treasury bond rates increase. The re-financing opportunity will not last much longer.

WASP SPRAY

A friend who is a receptionist in a church in a high risk area was concerned about someone coming into the office on Monday to rob them when they were counting the collection. She asked the local police department about using pepper spray and they recommended to her that she get a can of wasp spray instead.

The wasp spray, they told her, can shoot up to twenty feet away and is a lot more accurate, while with the pepper spray, they have to get too close to you and could overpower you. The wasp spray temporarily blinds an attacker until they get to the hospital for an antidote. She keeps a can on her desk in the office and it doesn't attract attention from people like a can of pepper spray would. She also keeps one nearby at home for home protection... Thought this was interesting and might be of use.

Val Glinka teaches self-defense to students at Sylvania Southview High School. For decades, he's suggested putting a can of wasp and hornet spray near your door or bed. Glinka considers it inexpensive, easy to find, and more effective than mace or pepper spray. The cans typically shoot 20 to 30 feet; so if someone tries to break into your home, Glinka says, "spray the culprit in the eyes". It's a tip he's given to students for decades. It's also one he wants everyone to hear. If you're looking for protection, Glinka says look to the spray.

Sunday, March 20, 2011

March Madness

This will discuss the week's news and what it means for an investor.

Vanguard

Gradual improvements in the labor market helped lift the Federal Reserve's outlook for economic recovery, though construction remains a drag. Food and energy prices jumped, with core inflation still modest. But investors were perhaps more distracted by declines in stock prices during the week in the wake of Japan's earthquake-tsunami-nuclear woes. For the week ended March 18, the S&P 500 Index fell 1.9% to 1,279 (for a year-to-date total return—including price change plus dividends—of about 2.2%). The yield of the 10-year U.S. Treasury note fell 12 basis points to 3.28% (for a year-to-date decrease of 2 basis points).

March Madness

This week the news media was working overtime on topics including: Japan, Libya, US budget, Wisconsin law, nuclear meltdown, radiation poisoning, tsunami, earthquake, etc. As the news was reported the markets would try to figure out what it meant and would go up and down. The EPA did not help us by reporting that radiation was on the airplanes leaving Japan which added to the hysteria, they forgot to add the part that it was an insignificant amount.

What got lost in all of the news was the Federal Reserve stating that the economy continues to improve. I visited a supplier this week that makes electrical conductor for different industries who is hiring and training people to handle their growing business. Everything that I see continues to suggest that our economy continues to improve.

Last week I state that I believe that the events in Japan are devastating on a human level and good from an economic level in the longer term. I continue to believe this and I view that the decline in the stock market has created a buying opportunity.

Facts - Human Body

• The skeleton of an average 160-pound individual weighs 29 lbs.
• Skin is the body’s largest organ.
• The average adult has between 40 and 50 billion fat cells.
• The average digestive tract of an adult is 30 feet long.
• The thighbone is the strongest bone in the body. (Ounce for ounce, it has a greater pressure tolerance and bearing strength than a rod of equal size in cast steel.)
• The tongue is the strongest muscle in the body.
• The average human eyelash lives about 150 days.
• The average human heart beats about 100,000 times every 24 hours. (In a 72-year lifetime, the heart beats more than 2.5 billion times.)
• The average human liver is more than five times the weight of the human heart.
* There are 22 bones in the adult human skull.

Sunday, March 13, 2011

Japan

Our thoughts and prayers go out to the people of Japan, what a terrible and devastating series of events. A question this is stated in the news is what does it mean for the world's economy? This newsletter tries to give some answers to this question. At the end are some famous quotes for your enjoyment.

Vanguard

The markets took a late-winter slide on Thursday after the Commerce Department reported that the U.S. trade deficit had broadened well above estimates in January. China also showed a trade deficit, its first in nearly a year. Meanwhile, consumer credit, retail sales, and business inventories all showed healthy increases. For the week ended March 11, the S&P 500 Index declined 1.3% to 1,304 (for a year-to-date total return—including price change plus dividends—of about 4.1%). The yield of the 10-year U.S. Treasury note decreased 9 basis points to 3.40% (for a year-to-date increase of 10 basis points).


Japan

To understand the economic impact of this disaster we need to remember the law of supply and demand as well as the influence of insurance. The law of supply and demand means that prices go up as supply goes down and demand goes up and conversely prices go down as supply goes up and demand goes down.

We know that the nation of Japan is the 3rd largest economy in the world and is an importer of oil and an exporter of cars and electronics. The demand for oil will go down so expect the price of oil to go down. The supply of cars and electronics will go down so expect the price for cars and electronics to go up and you should consider buying now instead of a month from now.

We know that much of the infrastructure must be rebuilt like roads, transportation systems, telecommunication systems, energy systems, etc. Also, we know that millions of buildings and homes have been destroyed that must be rebuilt as well as automobiles and personal property that must be replaced. The demand for commodites like steel, aggregate, cement, copper, and aluminum are going to increase so expect these commodity prices to go up in general.

The insurance industry plays a big role in this recovery. We pay insurance premiums which reduces our spending power on an ongoing basis and we get this spending power back when we collect. The same thing happens for every business and person in Japan. Insurance companies will fund much of the rebuilding. Also the government must spend a huge amount of money to replace infrastructure.

The bottom line is that the rebuilding of Japan is very positive for economies around the world. Companies around the world will grow because the government, businesses and people of Japan will need more products. This is positive for stock markets around the world. In the long run it will also be somewhat inflationary so interest rates will tend to rise.

As an investor, this means that the current investment strategy will be maintained.

Famous Quotes (Insults)

It's not nice to insult anyone, but sometimes it can be appropriate and funny. Here are some for your enjoyment.

• “Lady Astor to Winston Churchill - "If you were my husband I'd give you poison." Churchill to Lady Astor - "If you were my wife, I'd drink it."
• "He had delusions of adequacy." Walter Kerr
• "He has all the virtues I dislike and none of the vices I admire." Winston Churchill
• "A modest little person, with much to be modest about." Winston Churchill
• "I have never killed a man, but I have read many obitu-aries with great pleasure." Clarence Darrow
• "Thank you for sending me a copy of your book; I'll waste no time reading it." Moses Hadas
• "He can compress the most words into the smallest idea of any man I know." Abraham Lincoln
• "I didn't attend the funeral, but I sent a nice letter saying I approved of it." Mark Twain
• "I feel so miserable without you - it's almost like having you here." Stephen Bishop
• "He has no enemies, but is intensely disliked by his friends." Oscar Wilde
• "I've just learned about his illness. Let's hope it's nothing trivial." Irvin S. Cobb
• "He is not only dull himself; he is the cause of dullness in others." Samuel Johnson
• "There's nothing wrong with you that reincarnation won't cure." Jack E. Leonard
• "They never open their mouths without subtracting from the sum of human knowledge." Thomas Brackett Reed
• "He loves nature in spite of what it did to him." Forrest Tucker
• "He has Van Gogh's ear for music." Billy Wilder
• "I've had a perfectly wonderful evening. But this wasn't it." Groucho Marx

Sunday, March 6, 2011

Understanding Oil

This week we saw a tug of war between the signs of an improving economy and then fear of an oil shortage. As good economic data was published, the stock market and the yield on long term treasury bonds would go up. As fear of an oil shortage was spread the opposite occurred. This newsletter provides the 2 key indicators to watch to see if either exuberance over the economy or fear with an oil shortage will win. The first section is from Vanguard. The last section is OPEC related data.

The world produces -- and consumes -- about 80 million barrels of crude oil a day. At a $100 a barrel, that amounts to $8 billion dollars or just short of $3 trillion dollars a year. World GDP is about $60 trillion using current dollar exchange rates, and about 20% higher if measured on the basis of purchasing power parity. That means oil consumption is about 4% to 5% of world GDP.

Vanguard

March came in like a lamb, at least as far as U.S. economists were concerned. Although turmoil in the Middle East and northern Africa have forced Americans to pay more for gas at the pump, at least temporarily, this week's data seemed to reflect an economy on the mend. For the week ended March 4, the S&P 500 Index rose 0.1% to 1,321 (for a year-to-date total return—including price change plus dividends—of about 5.5%). The yield of the 10-year U.S. Treasury note rose 7 basis points to 3.49% (for a year-to-date increase of 19 basis points).

Understanding Oil

The 2 keys to understanding the direction of oil are oil production from Saudi Arabia and releases of oil from the US Strategic Petroleum Reserve. Saudia Arabia is the largest producer of oil in the world and has reserve capacity that is greater than the production from unstable governments like Libya, Algeria, and Tunisia. The other key is releases from our reserve, enough to replace Liby's production for about 1 year, and this week Treasury Secretary stated that releases would occur if necessary.

The big wild card in forecasting oil prices is predicting what will happen in Saudi Arabia. Saudi Arabia has the largest oil reserves, estimated at about 20% of total world supply. The country produced about 9 million b/d of crude in 2009, although a few years ago it produced well over 11 million b/d. Libya exports less than $2 million barrels a day, about 2% of world output. Saudi Arabia is estimated to be able to produce 3 million to 4 million extra barrels a day (b/d), and they have indicated they will stabilize oil prices.

The 727-million-barrel U.S. Strategic Petroleum Reserve is the largest stockpile of government-owned emergency crude oil in the world. Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy. When this reserve is tapped, it means that the US Government is going to sell oil on the open market to make money which is why the Treasury Secretary made this statement. It is a clear indicator of a market top for the price of oil. Let's see making $10 profit per barrel brings in $7.27 Billion to the Treasury, very nice.

The U.S. consumes about 19 million barrels of oil a day and produces about 9 million b/d, meaning we import about 10 million b/d. Each $10 rise in the price of a barrel of oil increases our import bill by about $100 million a day or about $36 billion a year. In our $15 trillion economy, this increase costs us about 2 tenths of one percent of GDP. If crude rises $20 barrel, as it has from the beginning of the year, this increase will shave about 4 tenths of one percent from GDP. This is hardly debilitating to an economy that is expected to grow between 3% to 4% this year.

Bottom Line: As long as Saudia Arabia remains stable the current investment strategy makes sense. If unrest hits Saudia Arabia, the strategy will shift immediately to being very defensive.

OPEC Data (WSJ February 28, 2011)

Saudia Arabia: 12 million barrels per day (mbd) capacity, 8.5 mbd production, 3.5 mbd in reserve
Iran: 4 mbd capacity, 4 mbd production, 0 mbd reserve
Iraq: 2.5 mbd capacity, 2.4 mbd production, 0.1 mbd reserve
Kuwait: 2.5 mbd capacity, 2.3 mbd production, 0.2 mbd reserve
U.A.E.: 2.7 mbd capacity, 2.3 mbd production, 0.4 mbd reserve
Nigeria: 2.4 mbd capacity, 2.3 mbd production, 0.1 mbd reserve
Venezuela: 2.4 mbd capacity, 2.2 mbd production, 0.2 mbd reserve
Angola: 2.0 mbd capacity, 1.8 mbd production, 0.2 mbd reserve
Libya: 1.8 mbd capacity, 1.6 mbd production, 0.1 mbd reserve
Algeria: 1.3 mbd capacity, 1.3 mbd production, 0 mbd reserve
Qatar: 0.8 mbd capacity, 0.7 mbd production, 0.1 mbd reserve
Ecuador: 0.4 mbd capacity, 0.4 mbd production, 0 mbd reserve