The key word for investors this past week was volatility. The newsletter will briefly recap the week's events and a section on Memorial Day facts.
This past week the stock market, bond market, and commodities went absolutely psycho. Each day saw dramatic swings that made me rather nervous and the account's of clients who expressed some nervousness were tweaked to be more conservative. I am very bullish on the future of the economy and this is a short term move. Once this volatility subsides, the VIX returns to a more normal level, the account positions should be returned.
Memorial Day Facts:
1) When was Memorial Day first celebrated? Memorial day was first celebrated on May 30, 1868. It was observed by placing flowers on the graves of Union and Confederate soldiers during the first national celebration. Gen. James Garfield made a speech at Arlington National Cemetery, after which around 5,000 participants helped to decorate the graves of the more than 20,000 Union and Confederate soldiers who were buried there.
2) Why is Memorial Day celebrated on May 30? Three years after the Civil War ended, on May 5, 1868, the head of the Grand Army of the Republic (GAR) established Decoration Day as a time for the nation to decorate the graves of the war dead with flowers. Maj. Gen. John A. Logan declared that Decoration Day should be observed on May 30. This date was chosen because flowers would be in bloom all over the country.
3) General John Alexander Logan ordered the Memorial Day holiday to be observed by decorating the war dead.
4) On Memorial Day, the flag should be at half-staff until noon only, then raised to the top of the staff.
5) Red Poppies are recognized as the Memorial Day flower.
6) Memorial Day was first called “Decoration Day” because of the practice of decorating soldier’s graves with flowers.
7) New York was the 1st state to officially recognize Memorial Day.
8) Flowers and flags are the two most popular items people use to remember soldiers.
9) Memorial Day was declared a federal holiday in 1971.
Saturday, May 29, 2010
Saturday, May 22, 2010
Fear Index
What a week for an investor while good news was being reported on the economy it did not matter as fear was the emotion of the week. Someone told me that they had an intuition in January and in early May that it was a good time to take profit. It appeared that he was correct on both accounts and this started me on a path of correlating this intuition to data.
My research showed that this intuition correlates with the VIX also known as the fear index. An inverse correlation exists with the value of the VIX with the stock market, the higher the VIX the lower the stock market. As the VIX rises the stock market goes down and vice versa. In the tug of war, that has been the subject of several newsletter, this measures the pull on the other fear side of the rope.
This newsletter will have 3 section, a recap from Vanguard, information on VIX, and how to invest using the VIX.
Vanguard Information
The nation's economic growth, which wasn't rising at record pace to begin with, appears to be slowing down. For the first time in more than a year, the Conference Board's index of leading indicators fell. But the news wasn't all negative. Minutes from the last Federal Open Market Committee meeting revealed confidence in the economy's recovery. According to reports on the latest wholesale and consumer prices, inflation shouldn't be a problem for the foreseeable future. There was good and bad news on the housing front as housing starts were up and building permits were down. The U.S. stock market continued to struggle. For the week, the S&P 500 Index fell 4.2% to about 1,088 (for a year-to-date total return—including price change plus dividends—of about -1.7%). The yield of the 10-year U.S. Treasury note fell 24 basis points to 3.20% (for a year-to-date decrease of 65 basis points).
Fear Index - VIX
VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options that was created about 20 yeaers ago. It is not backed by anything and positions held are merely a prediction of a future. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.
Make Money with VIX
My underlying theory is that since investment firms only make money when people trade, buy or sell, trading opportunities must be created. So while an economic business cycle is the major market mover, investing cycles exist within the business cycle. For my theory to be true VIX values must be higher now than before, and this appears to be true.
The VIX value reached about 45 last week, quite a bit less than the all time record about 80 that was reached during 2008/2009. This means that while the past few weeks have been frustrating the amount of pain is not close to what we have been through. Next week, if the VIX continues to decline then the current positions should be maintained and if it goes above 45 it means that a more conservative approach would be warranted. A normal value would be around 20.
Getting back to this person's intuition, how does VIX correlate? By using a moving average approach, a time to take profits can be predicted using a 200 day moving average. A time to buy can be predicted by using a 65 day or 200 day moving average depending on risk tolerance. This strategy does not makes sense when VIX values are in a normal range. Taking profits based upon investment cycles makes sense for an IRA account since these trades have no tax implications and when to sell in a regular account when needing money in the short term.
My research showed that this intuition correlates with the VIX also known as the fear index. An inverse correlation exists with the value of the VIX with the stock market, the higher the VIX the lower the stock market. As the VIX rises the stock market goes down and vice versa. In the tug of war, that has been the subject of several newsletter, this measures the pull on the other fear side of the rope.
This newsletter will have 3 section, a recap from Vanguard, information on VIX, and how to invest using the VIX.
Vanguard Information
The nation's economic growth, which wasn't rising at record pace to begin with, appears to be slowing down. For the first time in more than a year, the Conference Board's index of leading indicators fell. But the news wasn't all negative. Minutes from the last Federal Open Market Committee meeting revealed confidence in the economy's recovery. According to reports on the latest wholesale and consumer prices, inflation shouldn't be a problem for the foreseeable future. There was good and bad news on the housing front as housing starts were up and building permits were down. The U.S. stock market continued to struggle. For the week, the S&P 500 Index fell 4.2% to about 1,088 (for a year-to-date total return—including price change plus dividends—of about -1.7%). The yield of the 10-year U.S. Treasury note fell 24 basis points to 3.20% (for a year-to-date decrease of 65 basis points).
Fear Index - VIX
VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options that was created about 20 yeaers ago. It is not backed by anything and positions held are merely a prediction of a future. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.
Make Money with VIX
My underlying theory is that since investment firms only make money when people trade, buy or sell, trading opportunities must be created. So while an economic business cycle is the major market mover, investing cycles exist within the business cycle. For my theory to be true VIX values must be higher now than before, and this appears to be true.
The VIX value reached about 45 last week, quite a bit less than the all time record about 80 that was reached during 2008/2009. This means that while the past few weeks have been frustrating the amount of pain is not close to what we have been through. Next week, if the VIX continues to decline then the current positions should be maintained and if it goes above 45 it means that a more conservative approach would be warranted. A normal value would be around 20.
Getting back to this person's intuition, how does VIX correlate? By using a moving average approach, a time to take profits can be predicted using a 200 day moving average. A time to buy can be predicted by using a 65 day or 200 day moving average depending on risk tolerance. This strategy does not makes sense when VIX values are in a normal range. Taking profits based upon investment cycles makes sense for an IRA account since these trades have no tax implications and when to sell in a regular account when needing money in the short term.
Saturday, May 15, 2010
Tug of War, Greece & Portugal
This newsletter has 3 segments: the economic update from Vanguard, the tug of war on Wall Street between fear over European budget deficits versus an improving economic outlook, and information on the measures that Greece and Portugal are taking to address their debt burden. It is important to watch the actions of the European countries as this gives us a glimpse of what will happen to us as our debt burden continues to grow.
Vanguard Information:
The United States continued to show signs of recovery this week as retail sales, industrial production, and business inventories all increased. Although the good news was somewhat dampened by a widening trade deficit in March, many economists believe the continued increase in both U.S. exports and imports is another signal of an economy that is beginning to strengthen. For the week ended May 14, the S&P 500 Index rose 2.2% to about 1,136 (for a year-to-date total return—including price change plus dividends—of about 2.6%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 3.44% (for a year-to-date decrease of 41 basis points).
Tug of War:
The tug of war between fear with European debt versus the improving economic picture continued into the 3rd week. Early in the week the focus was on the improving USA and global economy, fear was gone, and the stock market rejoiced. Late in the week fear reigned supreme and people forgot about an improving economy and the stock market cried. It is like people on one side of the rope gave up for a few days followed by the people on the other side giving up.
The good news about this is that Eurpoean nations are addressing their debt issue and it shows us likely events that will occur in our nation as our debt to GDP ratio is now at about 90% and growing. This means that eventually the improving global economy should be the winning side in the tug of war. The question is how long will this game continue, giving us plenty of volatility.
Every cloud has a silver lining and this fear of debt does benefit us consumers in a few ways. First, long term interest rates are dropping which lowers mortgage rates low as well as giving us very nice gains in our bond mutual funds. Second, commodity prices except gold, are dropping which will lower the price of oil, gasoline, copper, etc. Third, it is cheaper to travel to Europe as the euro weakens versus the US dollar.
Greece and Portugal Debt Reduction:
Greece and Portugal have started their spending austerity programs to balance the budget. Greece chose a path that reduces pensions and raises taxes. Portugal chose a path that reduces spending and raises taxes. Portugal, reduced government salaries by 5% and froze them for next year as well as adding a Value Added Tax, VAT, and eliminating the tax credit for having a child. Greece has a higher debt to GDP ratio than Portugal and kept a focus on long term pension obligations. Portugal being in better financial condition kept a focus on shorter term obligations. A Value Added Tax is a nice way to say a higher sales tax.
What does this mean for us? Expect a progression approach where we act like Portugal initially followed by acting like Greece. This means expect subtle tax increases like a VAT and elimination of the child tax credit that was started under the Bush 2 administration. If you listen to the experts in the news about or budget deficit they state that the biggest budget problem is entitlements such as Social Security and Medicare, the same solution adopted by Greece.
Vanguard Information:
The United States continued to show signs of recovery this week as retail sales, industrial production, and business inventories all increased. Although the good news was somewhat dampened by a widening trade deficit in March, many economists believe the continued increase in both U.S. exports and imports is another signal of an economy that is beginning to strengthen. For the week ended May 14, the S&P 500 Index rose 2.2% to about 1,136 (for a year-to-date total return—including price change plus dividends—of about 2.6%). The yield of the 10-year U.S. Treasury note fell 1 basis point to 3.44% (for a year-to-date decrease of 41 basis points).
Tug of War:
The tug of war between fear with European debt versus the improving economic picture continued into the 3rd week. Early in the week the focus was on the improving USA and global economy, fear was gone, and the stock market rejoiced. Late in the week fear reigned supreme and people forgot about an improving economy and the stock market cried. It is like people on one side of the rope gave up for a few days followed by the people on the other side giving up.
The good news about this is that Eurpoean nations are addressing their debt issue and it shows us likely events that will occur in our nation as our debt to GDP ratio is now at about 90% and growing. This means that eventually the improving global economy should be the winning side in the tug of war. The question is how long will this game continue, giving us plenty of volatility.
Every cloud has a silver lining and this fear of debt does benefit us consumers in a few ways. First, long term interest rates are dropping which lowers mortgage rates low as well as giving us very nice gains in our bond mutual funds. Second, commodity prices except gold, are dropping which will lower the price of oil, gasoline, copper, etc. Third, it is cheaper to travel to Europe as the euro weakens versus the US dollar.
Greece and Portugal Debt Reduction:
Greece and Portugal have started their spending austerity programs to balance the budget. Greece chose a path that reduces pensions and raises taxes. Portugal chose a path that reduces spending and raises taxes. Portugal, reduced government salaries by 5% and froze them for next year as well as adding a Value Added Tax, VAT, and eliminating the tax credit for having a child. Greece has a higher debt to GDP ratio than Portugal and kept a focus on long term pension obligations. Portugal being in better financial condition kept a focus on shorter term obligations. A Value Added Tax is a nice way to say a higher sales tax.
What does this mean for us? Expect a progression approach where we act like Portugal initially followed by acting like Greece. This means expect subtle tax increases like a VAT and elimination of the child tax credit that was started under the Bush 2 administration. If you listen to the experts in the news about or budget deficit they state that the biggest budget problem is entitlements such as Social Security and Medicare, the same solution adopted by Greece.
Saturday, May 8, 2010
Tug of War and Happy Mother's Day
What a week in world events with fear running rampant. The tug of war that was subject of last week's newsletter was in full force this past week, and it seemed like a war and the side with good news let go of the rope. The first section is from Vanguard giving a weekly recap. Next is a section on the events in Greece. Finally, a section on Mother's Day.
Vanguard
The U.S. stock market's historic plunge toward the end of the week, which wiped out gains for the year, overshadowed positive news about the economy. Job growth surged in April as businesses gained more confidence and hired more people in a variety of sectors. Firms invested more in their businesses, ramped up production, and restocked depleted inventories. The manufacturing sector has played a key role in this recovery; it's added more than 100,000 jobs since December. Economists said continued improvement in employment in all sectors will be critical for a sustained recovery. For the week ended May 7, the S&P 500 Index fell 6.4% to about 1,111 (for a year-to-date total return of about 0.3%). The yield of the 10-year U.S. Treasury note fell 24 basis points to 3.45% (for a year-to-date decrease of 40 basis points).
Greece
This week the debt level of Greece and bailout by the IMF was the top story that trumped all other news. It is like the mouse that roared. The economy of Greece comprises only 2% of the European Union which means that it is a very small fraction of the world's economy, it is in the noise. The IMF bailout is on the magnitude of $130 billion, about 1 month on US debt last year. So if Greece's economy is so small, then what is all the fuss? The answer is the concern that this is the tip of the iceberg in Europe.
It is good to learn from the Greece debt situation because our country is going down the same road. We are truly trying as a government to be like Europe, not a good road. So what we learn from this situation is that governments that go broke pay higher interest rates, have to go on an austerity plan that includes reducing government pension payments, and higher taxes. Sooner or later when a country ignores being fiscally responsible the end result is not pretty.
What this means that in the future, years from now, as our debt balloons and we have to go on an austerity plan to balance the budget public benefits will be reduced, like: pensions, Social Security, and Medicare. It is good to understand that we need to be prepared to retirement beyond counting on Social Security and Medicare benefits.
The question is the stock market correction mean that we have a repeat of 2008 or is this a buying opportunity? My perspective is that this situation is nothing in comparison to what we have alrealy gone through and given the improving economy this represents a buying opportunity. The good news on the USA and global economy keeps getting better which means that the future looks better than today.
Mothers Day Trivia: Believe It or Not Records
Mothers Day Trivia: Oldest Mother
On April 9, 2003, Satyabhama Mahapatra, a 65-year-old retired schoolteacher in India, became the world's oldest mother when she gave birth to a baby boy. Satyabhama and her husband had been married 50 years, but this is their first child. The baby was conceived through artificial insemination using eggs from the woman's 26-year-old niece, Veenarani Mahapatra, and the sperm of Veenarani's husband.
Mothers Day Trivia: Most Surviving Children
Bobbie McCaughey is the mother who holds the record for the most surviving children from a single birth. She gave birth to the first set of surviving septuplets - four boys and three girls -on November 19, 1997, at the University Hospital, Iowa, US. Conceived by in vitro fertilization, the babies were delivered after 31 weeks by cesarean in the space of 16 minutes. The babies are named Kenneth, Nathaniel, Brandon, Joel, Kelsey, Natalie and Alexis.
Mothers Day Trivia: Shortest Interval Between Two Children
Jayne Bleackley is the mother who holds the record for the shortest interval between two children born in separate confinements. She gave birth to Joseph Robert on September 3, 1999, and Annie Jessica Joyce on March 30, 2000. The babies were born 208 days apart.
Mothers Day Trivia: Longest Interval Between Two Children
Elizabeth Ann Buttle is the mother who holds the record for the longest interval between the birth of two children. She gave birth to Belinda on May 19,1956 and Joseph on November 20, 1997. The babies were born 41 years 185 days apart. The mother was 60 years old when her son Joseph was born.
Mothers Day Trivia: Highest Recorded Number of Children
The highest officially recorded number of children born to one mother is 69, to the first wife of Feodor Vassilyev (1707-1782) of Shuya, Russia. Between 1725 and 1765, in a total of 27 confinements, she gave birth to 16 pairs of twins, seven sets of triplets, and four sets of quadruplets. 67 of them survived infancy.
Vanguard
The U.S. stock market's historic plunge toward the end of the week, which wiped out gains for the year, overshadowed positive news about the economy. Job growth surged in April as businesses gained more confidence and hired more people in a variety of sectors. Firms invested more in their businesses, ramped up production, and restocked depleted inventories. The manufacturing sector has played a key role in this recovery; it's added more than 100,000 jobs since December. Economists said continued improvement in employment in all sectors will be critical for a sustained recovery. For the week ended May 7, the S&P 500 Index fell 6.4% to about 1,111 (for a year-to-date total return of about 0.3%). The yield of the 10-year U.S. Treasury note fell 24 basis points to 3.45% (for a year-to-date decrease of 40 basis points).
Greece
This week the debt level of Greece and bailout by the IMF was the top story that trumped all other news. It is like the mouse that roared. The economy of Greece comprises only 2% of the European Union which means that it is a very small fraction of the world's economy, it is in the noise. The IMF bailout is on the magnitude of $130 billion, about 1 month on US debt last year. So if Greece's economy is so small, then what is all the fuss? The answer is the concern that this is the tip of the iceberg in Europe.
It is good to learn from the Greece debt situation because our country is going down the same road. We are truly trying as a government to be like Europe, not a good road. So what we learn from this situation is that governments that go broke pay higher interest rates, have to go on an austerity plan that includes reducing government pension payments, and higher taxes. Sooner or later when a country ignores being fiscally responsible the end result is not pretty.
What this means that in the future, years from now, as our debt balloons and we have to go on an austerity plan to balance the budget public benefits will be reduced, like: pensions, Social Security, and Medicare. It is good to understand that we need to be prepared to retirement beyond counting on Social Security and Medicare benefits.
The question is the stock market correction mean that we have a repeat of 2008 or is this a buying opportunity? My perspective is that this situation is nothing in comparison to what we have alrealy gone through and given the improving economy this represents a buying opportunity. The good news on the USA and global economy keeps getting better which means that the future looks better than today.
Mothers Day Trivia: Believe It or Not Records
Mothers Day Trivia: Oldest Mother
On April 9, 2003, Satyabhama Mahapatra, a 65-year-old retired schoolteacher in India, became the world's oldest mother when she gave birth to a baby boy. Satyabhama and her husband had been married 50 years, but this is their first child. The baby was conceived through artificial insemination using eggs from the woman's 26-year-old niece, Veenarani Mahapatra, and the sperm of Veenarani's husband.
Mothers Day Trivia: Most Surviving Children
Bobbie McCaughey is the mother who holds the record for the most surviving children from a single birth. She gave birth to the first set of surviving septuplets - four boys and three girls -on November 19, 1997, at the University Hospital, Iowa, US. Conceived by in vitro fertilization, the babies were delivered after 31 weeks by cesarean in the space of 16 minutes. The babies are named Kenneth, Nathaniel, Brandon, Joel, Kelsey, Natalie and Alexis.
Mothers Day Trivia: Shortest Interval Between Two Children
Jayne Bleackley is the mother who holds the record for the shortest interval between two children born in separate confinements. She gave birth to Joseph Robert on September 3, 1999, and Annie Jessica Joyce on March 30, 2000. The babies were born 208 days apart.
Mothers Day Trivia: Longest Interval Between Two Children
Elizabeth Ann Buttle is the mother who holds the record for the longest interval between the birth of two children. She gave birth to Belinda on May 19,1956 and Joseph on November 20, 1997. The babies were born 41 years 185 days apart. The mother was 60 years old when her son Joseph was born.
Mothers Day Trivia: Highest Recorded Number of Children
The highest officially recorded number of children born to one mother is 69, to the first wife of Feodor Vassilyev (1707-1782) of Shuya, Russia. Between 1725 and 1765, in a total of 27 confinements, she gave birth to 16 pairs of twins, seven sets of triplets, and four sets of quadruplets. 67 of them survived infancy.
Sunday, May 2, 2010
Tug of War
This week saw a tug of war between worry of debt levels in the European Union on one side against corporate earnings and the Federal Reserve on the other side. This newsletter will give the weekly recap from Vanguard and more on this tug of war and what it means.
Vanguard Weekly Recap:
The U.S. economy continued to expand during the first three months of the year, according to the latest gross domestic product reading. Consumer confidence and employer costs also showed signs of slow, steady growth. Still, the Federal Open Market Committee announced that its target for short-term interest rates will remain unchanged for the foreseeable future. For the week ended April 30, the S&P 500 Index fell 2.5% to 1,187 (for a year-to-date total return of about 7.1%). The yield of the 10-year U.S. Treasury note fell 15 basis points to 3.69% (for a year-to-date increase of 16 basis points).
Tug of War:
Going into the week the mood on Wall Street was upbeat with people predicting sunny skies ahead. Early in the week, concerns with the debt level in Europe became the top story and storm clouds rolled in. Let's go through what this is and its meaning.
Portugal, Ireland, Italy, Greece, and Spain (PIIGS) have high debt levels relative to the economic output of their respective country as measured by GDP. The reason that they got into this mess is because the people acted like PIGS doing what was good for now and forgetting about later and later finally arrived. The bonds issued by Greece was downgraded which means that the interest rate rose because of a higher risk of default, meaning the citizens have to pay more to cover the higher interest charges. This downgrade lowered the stock markets around the world because Greece, and the rest of the PIIGS in the near future, would now have to pay more money in taxes to meet the bond obligations hurting their economic growth.
On the other side corporate earnings continue to come in above expectation with most companies talking about economic growth in the next quarter. While this is going on, the Federal Reserve has stated that short term interest rates are staying low to continue to help the economy grow. We are talking about economic growth in our country.
So what does this mean? While the US does have a higher amount of debt than I would like we are no where near the level of the PIIGS. It is good to observe what happens and learn that we NEVER want to be in the same situation as the PIIGS. We are experiencing economic growth and the Federal Reserve will continue to provide fuel with low interest rates. The sunny skies of corporate earnings and the Federal Reserve are much brighter than the dark clouds of the PIIGS.
The bottom line: We are staying with the current investment strategy. Relax and enjoy the good things of life.
Vanguard Weekly Recap:
The U.S. economy continued to expand during the first three months of the year, according to the latest gross domestic product reading. Consumer confidence and employer costs also showed signs of slow, steady growth. Still, the Federal Open Market Committee announced that its target for short-term interest rates will remain unchanged for the foreseeable future. For the week ended April 30, the S&P 500 Index fell 2.5% to 1,187 (for a year-to-date total return of about 7.1%). The yield of the 10-year U.S. Treasury note fell 15 basis points to 3.69% (for a year-to-date increase of 16 basis points).
Tug of War:
Going into the week the mood on Wall Street was upbeat with people predicting sunny skies ahead. Early in the week, concerns with the debt level in Europe became the top story and storm clouds rolled in. Let's go through what this is and its meaning.
Portugal, Ireland, Italy, Greece, and Spain (PIIGS) have high debt levels relative to the economic output of their respective country as measured by GDP. The reason that they got into this mess is because the people acted like PIGS doing what was good for now and forgetting about later and later finally arrived. The bonds issued by Greece was downgraded which means that the interest rate rose because of a higher risk of default, meaning the citizens have to pay more to cover the higher interest charges. This downgrade lowered the stock markets around the world because Greece, and the rest of the PIIGS in the near future, would now have to pay more money in taxes to meet the bond obligations hurting their economic growth.
On the other side corporate earnings continue to come in above expectation with most companies talking about economic growth in the next quarter. While this is going on, the Federal Reserve has stated that short term interest rates are staying low to continue to help the economy grow. We are talking about economic growth in our country.
So what does this mean? While the US does have a higher amount of debt than I would like we are no where near the level of the PIIGS. It is good to observe what happens and learn that we NEVER want to be in the same situation as the PIIGS. We are experiencing economic growth and the Federal Reserve will continue to provide fuel with low interest rates. The sunny skies of corporate earnings and the Federal Reserve are much brighter than the dark clouds of the PIIGS.
The bottom line: We are staying with the current investment strategy. Relax and enjoy the good things of life.
Subscribe to:
Posts (Atom)