As the bond markets improve, and equities makes attempts to rise, convertible securities hold an interesting and potentially attractive position within the capital structure of speculative companies.

Among the convertible securities funds, we like Vanguard Convertible fund the best (symbol VCVSX).  Unlike most other types of bonds, there are no ETF products for convertible bonds, although there are some preferred securities CEF products. We have no current opinion about the CEFs, except to say that generally we prefer mutual funds or ETFs over CEFs.

VCVSX versus convertible CEFs:

Those convertible CEFs with over $100 million of assets and 5 years or more of history are: JQC, NCV, AVK, CHY, and CHI. Here is how their recent performance compares to VCVSX (shown in solid black line).

Convertible Funds versus Other Bond Fund Types and the S&P 500:

We prefer VCVSX for convertible bond (and some preferred) exposure.  Here is how that fund compares to other types of bond funds and the S&P 500 in terms of yield, credit quality and duration.

click image to enlarge

Type, Yield, Credit Quality, Duration, ETF Alternative

Credit Rating Agency Scales

VCVSX is rated Ba2 (speculative grade, below investment grade, “junk”)

Chart Comparisons - Types of Bond Funds:

Bond ETFs have a relatively short history.  The chart that follows compares the Vanguard Convertible fund (VCVSX) to an intermediate Treasuries fund (IEF), an investment grade corporate bond fund (LQD), a high yield bond fund (HYG), and a national municipal bond fund (MUB).

The convertible bond fund has experienced the deepest drop in value over the past 18 months, and has recovered less than the high yield (junk) fund.  That is either a warning sign or a remaining opportunity to buy depressed bonds before spreads improve.

Chart Comparisons - S&P 500 versus Aggregate US Bonds versus Convertibles:

We use VBMFX for Barclay’s Aggregate US Bonds (alternatives: AGG, BND), and VFINX for the S&P 500 (alternatives: SPY, IVV) in these charts.

19 Years

10 Years

5 Years

1 Year

3 Months

Management:

VCVSX is managed for Vanguard by OakTree Capital Management and a dedicated, convertibles-only team overseeing about $7 billion of convertibles.  VCVSX has about $700 million of assets. Larry Keele is the portfolio manager.

Portfolio Composition:

The average coupon is 2.5%, but the SEC yield is 4.95% (below par market valuation - no net conversion premium).  Portfolio turnover is 78% per year.  Holdings are 7.3% convertible stocks, 84.1% convertible bonds, and 8.6% cash reserves.

Credit quality spans Moody’s “Aa” (investment grade) to less than “B” (worse than “junk”) with nearly 36% “not rated”, with a net “Ba2″ average quality (middle “junk”).

click to enlarge

The top ten positions account for 27% of assets.

Returns and Expenses:

The fund is actively managed, and therefore does not have the bare bones expense ratio of an index fund, but the ratio is still moderate at 77 basis points.

Returns through 11/30/2008 have been:

• 1-year: -34.81%
• 3-years: -5.37%
• 5-years: -0.67%
• 10-years: +4.42%
• since inception (6/17/1986): 6.79%

Why Not Just Buy High Yield Equities?

We may be at or near an historic opportunity to purchase equity assets at bargain prices. If you are certain of that, then high yield equities may make better sense.  We are still tentative on equity recovery and will likely remain so until after January.

The  “get paid while you wait” argument can be made with beaten down equities, but the risk of value falling (even permanent loss) is greater with equities than with bonds.  The higher in the capital structure you are, the lower the risk of permanent loss you have for any given issuer.

US Treasuries are at the top of the global capital structure, and are being flooded with Dollars.  The result is historically low yield and possibly significant risk of capital losses as eventual market recovery causes assets to be reallocated out of Treasuries into higher risk / higher potential return assets (both bonds and stocks).

Also, until the “E” in “P/E” becomes more believable and stops being revised down, and until the “G” in “PEG” becomes more believable and stops being revised down for both companies and countries, it is hard to say which equities are really cheap and which are really expensive.

Therefore, we prefer to be higher in the capital structure until more of the smoke clears.  Convertibles are a bit higher than equities, although generally below traditional bonds, and certainly lower in the national capital structure than Treasuries and municipals.

We have been stepping into municipals, investment grade corporate bonds, preferred stocks, inflation protected Treasuries (see TIPS article), and a little bit of high yield (below investment grade) bonds.

Conclusion:

We think the history of the convertible class, and VCVSX in specific, and the transitional condition of the bond and stock markets, support including convertible exposure in small amounts for those accounts which are suitable for inclusion of speculative (”junk”) assets.

Being paid more than twice the treasury rate, and about the same as the overall bond market rate, to wait for a possible capital gain from a future conversion premium seems to us to be a more conservative form of speculation than taking a direct equity position.

Since the yield on convertibles such as VCVSX is more than 1/2 of the long-term total return on stocks, we are comfortable with the long view for 1% to 5% of assets within an overall allocation, depending on the investor profile.

The author currently holds 2% of personal assets in VCVSX.

[Securities mentioned: SPY, IEF, AGG, LQD, HYG, MUB, VFINX, VFITX, VWITX, VBMFX, VWESX, VCVSX, VWEHX, JQC, NCV, AVK, CHY, CHI]

Richard Shaw
QVM Group LLC

The global economy is declining. As a result, prices of important kinds of “stuff” is falling. Governments are pouring money onto the markets to solve a problem that may have been caused by easy money originally.

If you party too much and awake the next day with a hangover, taking a shot of alcohol may take the immediate pain away.  However, it only delays and probably increases the pain when you finally decide to stop drinking, or become so sick you can’t drink any more. Taking that morning after drink is referred to as taking a “hair of the dog that bit you”.

Some people are concerned that the US and perhaps some other countries, particularly the UK, may be in the economic functional equivalent of taking a hair of the dog that bit them.

So What?

If that perspective makes sense, then what would be the consequence?

The original easy money caused an asset bubble. The absence of easy money caused a deflation in asset prices (commodities, real estate, stocks and most bonds) — pretty much everything but short-term sovereign debt.

Once the money being poured on begins to move, asset prices will begin to rise again. Then the question is whether all the extra money will make a new asset bubble, leaving governments without remaining tools to deal with a subsequent crisis? Either way inflation, not deflation will be the situation.

Investment coping strategies during inflation are different than during deflation. Investors need a plan to deal with the eventual change in circumstance. If hyperinflation were to occur, which some fear, all bets are off.  If the more likely “normal” or high inflation (not hyperinflation) occurs, shifts in asset class weights are appropriate.

Asset Class Rotation Based on Conditions

Note: We have stated before that we deviated from our core asset allocation, non-market timing approach this summer for assets we control by going substantially to cash before the current unpleasantness. We think standing aside as a train wreck is coming straight at you is not the same as market timing, which we do not practice — it’s self-preservation.  We think rebalancing a diversified set of asset classes works better than market timing under normal circumstances. This discussion is about re-weighting a fully invested and diversified portfolio, not about going entirely to one class or the other.

Monitoring Prices for Deflation or Inflation

If you are concerned about turning points between deflation and inflation, the CPI is not a good place to look.  It’s well known to be limited in scope and may also be managed to some degree by the government, which not only is a player (with indexed entitlement programs and inflation indexed bonds), but is also the scorekeeper and the final court of appeals.

The place to look for price level changes is directly at the prices of key items themselves.  They’ll let you know whether we are in deflation or inflation.

The rate of change of prices (shape of the curve) as well as absolute price levels will inform you.

We would suggest following this basket:

• oil (USO)
• copper (JJC)
• gold (GLD)
• soybeans (JJG for grains)
• EUR/USD fx (FXE)
• USD/JPY fx (FXY)
• 2-Year Treasuries (SHY for 1-3 yr T’s))
• 10-Year Treasuries (IEF for 7-10 year T’s)
• 30-Year Treasuries (TLT for 20+ year T’s)

The charts below are for five-year, monthly, perpetual near-month futures contracts, but stock investors can get a similar view by observing the ETF or ETN listed after each category (not all perfect matches, but reasonably useful if you don’t have spot or futures prices available).

Current Situation

There is no inflation, except in the price of Treasuries, particularly short dated Treasuries, as investors flee risk and prize liquidity.  The price premium on Treasuries will melt when investors once again move to riskier assets for yield and gain.

We are in a deflationary period.  No signs of inflation in these charts.

click images to enlarge

Gold

Oil

Copper

Soybeans

Euro
(Dollars per Euro - spot fx since 1994)
Dollar becoming stronger vs Euro

Yen
(Yen per Dollar - spot fx since 1994)
Dollar becoming weaker vs Yen

2-Year Treasuries
(up means lower interest rate)

10-Year Treasuries

30-Year Treasuries

Richard Shaw
QVM Group LLC

The matrix below is from Barclay’s iShares, showing the 1-year total return correlation between the S&P 500 (proxy SPY) and several key bond fund types available from iShares:

• AGG: Lehman Aggregate Bonds
• SHY: 1-3 year Treasuries
• IEI: 3-7 year Treasuries
• IEF: 7-10 year Treasuries
• TLH: 10-20 year Treasuries
• TLT: 20+ year Treasuries
• MUB: National Municipal Bonds
• LQD: Investment Grade Corporate Bonds
• MBB: Mortgage Backed Bonds
• HYG: High Yield (Junk) Bonds

click image to enlarge

The Barclay’s bond ETF correlations are for only one year, because many of the funds do not have three years of data, which is necessary for the next time period with the Barclay’s tool

Vanguard bond mutual funds have a similar, but not all the same objective funds, for which long-term returns are available for correlation between themselves and the S&P 500:

• VFINX: S&P 500
• VBFMX: Lehman Aggregate Bonds
• VFITX: Intermediate Treasuries
• VUSTX: Long Treasuries
• VFIIX: GNMA Bonds
• VWITX: Intermediate Tax-Exempt Bonds
• VFICX: Intermediate Investment Grade (Corporate) Bonds
• VWEHX: High Yield (Junk) Bonds

1-Year Correlations

3-Year Correlations

5-Year Correlations

10-Year Correlations

Bonds and cash are the principal winning class this year.  More investors will probably allocate more to bonds in the future, as a result of the drubbing they received in stocks, real estate and commodities.

More analysts are beginning to predict that bonds will do well in the near future.

US and other governments have done, and will do, a great deal to reliquefy the credit markets.  That may raise bond bids that were depressed due to liquidity problems, but the various bailout programs may also create inflation down the road that is damaging to bonds.

The flight to quality raised Treasury prices and lowered lesser quality credits.  When risk aversion decreases, Treasuries will probably decline and lesser credits will probably increase in price as investors rotate to higher risk for higher returns.

All fixed-income securities are at risk of loss of purchasing power due to inflation.

Rising interest rates, which will have to occur when the economy improves, tend to cause bonds to decline.

Bonds are an important portfolio volatility moderating asset class, and tend to reduce the severity of losses in down years.

Bond funds make more sense for most individual and small non-profit investors, because they are diversified with respect to individual bond default risk, and are professionally selected and managed.  Bond funds may also be more liquid for individual investors too, although that would vary by bond.

Do-It-Yourself investors may find this data useful in portfolio design.

Richard Shaw
QVM Group LLC

Whether we are coaching you as you manage your assets, or whether we are managing assets for you, if your investment account is mature, we follow this general approach — appropriately tweaked to your specific process preferences and needs.

A mature account is one for which expected new money additions are minimal compared to the size of the accumulated assets — where replacement of lost assets is not a practical or feasible option.

The approach also works well for non-mature accounts, but the “matching” issues may not be currently a necessary management issue.

THE BASIC IDEA

Your investment portfolio is not only about pursuit of realistic returns; it is also about risk management.

Matching investment assets with capital expenditure needs, and matching investment cash flows with needed spending from investments are among the most important aspects of portfolio risk management.

1.    Maturity matching: You should seek a portfolio that has maturities and ready liquidity at predictable values at predictable times to fund your portfolio dependent expected capital expenditures (capital budget).

2.    Cash flow matching: You should seek a portfolio that will provide sufficient cash flow to fund your expected spending (cash flow budget).

If your investment cash flow cannot be sufficient to fund your spending, then the difference should be treated as an annual capital item handled by maturity matching under the capital budget.

3.    Risk Limits: All the while, you need to be assured that you are being adequately compensated by cash flows and expected capital gains for the volatility and permanent capital loss risks you assume.

4.    Asset Allocation: Your asset class selection and class target weights should be consistent with your capital budget, your cash flow budget, and your risk limits.

5.    Process Management: The asset classes, target allocations and the securities selected to represent each class should be managed by a process that maintains the appropriate relationships between the capital budget, cash flow budget and risk limits (collectively, the management parameters).

MATURITY MATCHING

You have certain known or potential capital expenditure goals and obligations that can be estimated as to amount and timing.

If you have significantly more assets than required to meet your ultimate goals and obligations, you may be able to assume high levels of risk with all of your assets to pursue gains.

If you don’t have assets that substantially exceed your future needs, or if you simply want to conservatively manage what you have for whatever reason, these guidelines should be applied:

1.    Obligations due within 1 year should be funded with money market assets.

2.    Obligations due from 1 to 10 years should be funded with bonds in the same amounts as the obligations, and with average durations that match, or at least approximate, the timing of those obligations.

3.    Obligations due in more than 10 years may be funded with fixed income assets or with assets with greater potential for capital appreciation, such as common stocks or certain other non-fixed income assets.

CASH FLOW MATCHING

To the extent possible, the asset classes and the securities within the classes should be selected and weighted to provide investment income that at least matches the non-capital spending budget.

While capital spending is handled by matching with asset maturities, operational spending should be dealt with through investment income to the extent reasonably possible and consistent with risk limits.

Operational spending that cannot be covered by investment cash flow should be projected and treated as a scheduled capital expense with matching asset maturities.

RISK LIMITS

A balance between growth potential and loss potential is essential.

The more mature the asset pool (the less ability to replace assets with future earnings) the more the balance should lean toward conservation and sustainability — reducing loss potential at the expense of growth potential.

The less mature the asset pool (the more the ability to replace assets with future earnings), the more the balance should lean toward potential growth with the associated assumption of more risk.

The risk budget should take into consideration at least:

• market risk (volatility, liquidity and valuation)
  

• credit risk (quality, duration and interest rates)

• inflation risk

• currency risk

• geopolitical risk

• issue selection risk.

ASSET ALLOCATION

The classes in the portfolio should, to the extent possible, have low correlation of returns.

About 90% or more of portfolio return is generated by asset class selection and weights.  Only about 10% or less of long-term return is generated by security selection.  Therefore, time and effort is most effectively used concentrating on asset classes.

Asset classes should be considered in terms of long-term and short-term history, current market conditions, and expectations for future markets that will not be precisely like past markets. Substantial discussion of how and why classes may perform differently in the future is essential.

To prevent a single class from overwhelming the portfolio returns, the maximum weight should be 25% per class.

To assure that a single class has the potential to contribute meaningfully to portfolio returns; the minimum weight should be 5% per class.

To minimize exposure to security issue selection risk, no active management fund or non-core index fund should have a weight more than 5% (core, broad market index funds may be weighted to the extent of the asset class weight).  No individual stock or bond should be weighted more than 1.5 to 2%.

The overall asset allocation plan should include a set of allocation policy target weights (target weights) for each class.  A collar of minimum and maximum weights should accompany the target weights.  That provides some short-term flexibility around long-term allocations.

We prefer to sub-divide asset classes into these three categories:

• Strategic Core
• Tactical Emphasis
• Active Focus.

Each sub-category should be given a minimum and maximum weight within the class.  The result is a two-dimensional matrix of asset classes and asset class sub-categories.   Specific securities are selected to represent each sub-category of each asset class.

It is only necessary to utilize the Strategic Core sub-category to build a perfectly adequate and simple portfolio.  However, a progressively more complex portfolio can be developed by selecting securities for the Tactical Emphasis and/or the Active Focus categories

The Strategic Core should generally be populated with broad, diversified no-load, low expense funds, or ETFs.

Tactical Emphasis is generally populated with narrower no-load funds, ETFs or ETNs that increase the exposure to selected sectors, industries, regions or countries that are included in the broad funds of the Strategic Core.

Active Focus, if not left empty, is generally populated with specialty no-load funds or individual stocks or bonds.

See our prior article on Basic Suitability Issues in Portfolio Design for additional thoughts on appropriate portfolio risk based on “economic age” and financial condition.

See our weekly updated observation of a sample of asset allocation models proposed by notable sources (El Erian, Swensen, Standard & Poor’s, Money Magazine, American Association of Individual Investors, Ferri). Note these are not our recommendations, just observations of representative ideas from other people — potentially thought and discussion provoking.

BENCHMARKS

A simple benchmark portfolio should be selected against which to measure the management of the actual portfolio.

See our article on practical return measurement issues in portfolios with interim deposits and withdrawals.  Benchmarks don’t have “ins” and “outs”, but real world portfolios do.

The benchmark could be as simple as a two class model with US stocks and US bonds (i.e. 60% US stocks and 40% US bonds), or as complex as a single broad index fund for each asset class at the target weight for the class.

See our weekly updated short-term performance tables for 11 different simple two class (US stocks / US bonds) benchmarks.  Long-term performance of different US Stock / US Bond allocations from Vanguard are also provided there.

PROCESS MANAGEMENT

Portfolio design and continuing review should be done in terms of the management parameters (maturity matching, cash flow matching, risk limits, asset classes, target weights and security selection).

Tactical deviation from the allocation target weight within the minimum and maximum range for a class may be considered if supported by clear logic about the relationship between classes or changes in future expectations for the class.

Periodic rebalancing (and optional rebalancing triggered by threshold deviations form assigned weights) should be performed to satisfy the management parameters.

Rebalancing can be pursued more aggressively in a tax-free or tax deferred account due to no wash sale tax consequences of buying and selling securities.

See our article on the need for a tax-loss harvesting security substitution list for taxable accounts.

See our article on wash sale prohibitions with respect to IRAs and related party accounts.

Asset class target weights, minimum weights, and maximum weights should be considered for change no more than annually, but preferably not more often than at 3-year intervals.

Security selection for the Strategic Core holdings should be reviewed at such time as superior alternatives are available, but not more frequently than annually.

Security selection for the Tactical Emphasis holdings should be reviewed annually.

Security selection for the Active Focus holdings should be reviewed quarterly, or earlier on an event driven basis, if necessary.

Advisor and client should confer at least quarterly to review the portfolio — more often if events dictate, or if client prefers more communication.

Among other things, they should consider overall performance versus the benchmark, the performance of specific securities within the portfolio, current and expected market conditions, rebalancing, tax loss harvesting and security substitution, and any other possible needed adjustments or redesign.

Whether you call on us to assist you, or you use other advisors, or you manage your own assets, we recommend you adopt an approach similar to the one we have just described.

Richard Shaw
QVM Group LLC

The fact is that today’s stock markets were extraordinary in their strength. Emerging markets (proxy EEM) up about 20% and the S&P 500 (proxy SPY) up about 11%.

There are important positive facts to consider:

• for the past couple of weeks SPY has been trading sideways — that’s good.

• SPY went up 11% today — that’s good (although going up 11% after going down about 41% in the past 52 weeks, puts the index at about 35% down from its starting point).

• according to Bloomberg, before today, the MSCI World Index was trading at about 10.5 times trailing earnings — an historically attractive multiple.

• according to a table published by dshort.com, today’s rise in the S&P 500 was the 7th largest percentage gain since 1928 — that’s good (although dshort.com points out that almost all of the really powerful one day rallies in the past were inside bear markets that continued after the rally).

• the Fed has begun to buy commercial paper and that has allowed many corporations to borrow again, that being important to inventory build and general business activity — that’s very good.

• Governments are now accommodative and injecting much liquidity and beginning to coordinate relief — that’s good for now (although the long-term price we must pay for today’s relief is not clear).

Here are some generally positive thoughts from the press:

New York Times - Oct 28
Even as Dow Soars 11%, Skeptics Lurk

“For me, the best part about today is that the market went up in the wake of what was some really discouraging economic news,” said Stuart Schweitzer, global markets strategist at J.P. Morgan Private Bank. “When the markets go up on bad news, it holds out hope that the bad news has been digested.” …

“People are feeling much more comfortable that the financial system is stabilizing, and that allows them to focus on fundamental valuations of stocks,” said Todd Steinberg, head of equities and commodity derivatives at BNP Paribas-Americas. “The caveat to that is there is still a lot of economic issues to come.” …

… some prominent investors like Warren E. Buffett and R. Jeremy Grantham, who had been bearish in the past, have in recent days said that they think stock prices had fallen far enough for them to start buying …

“Circle today as one of those days that the fundamental issues trumped panic and fear,” said Robert J. Froehlich, vice chairman and chief investment strategist with DWS Investments. But, he added, he was not ready to declare that stocks would not fall below the closing level on Monday.

Not So Positive Information:

Our concern is how to possibly reconcile the enthusiasm shown today with the really terrible news on other fronts.

We do recognize that when markets rise in the face of bad news, that is a good sign for the market — climbing a wall of worry and all that.  However, we have so much to worry about that the wall seems too tall still.

Consider these negative points from today’s news and decide for yourself if they can coexist with a reversal from bear to bull in the stock markets.

Financial Times - Oct 28
Wall St gains strongly despite grim data

US equities soared on Tuesday … in spite of a fresh glut of grim economic data.

… swings in the S&P 500 were tightly correlated with moves in the exchange rates of the euro and dollar against the yen. That suggested widespread selling of yen positions had left traders with cash to invest in US stocks.

… The market’s late afternoon surge came even after figures showed consumer confidence slumped to a record low in October, which Ian Shepherdson, of High Frequency Economics, described as “extraordinarily awful.” Separate data showed prices of single-family homes plunged by a record percentage in August.

Business Week - Oct 28
Corporate bond rates keep rising, portend defaults

The recent decline in bank-to-bank lending rates is having no effect on corporate bonds, which continue to plunge in value — a sign that the market believes more loan defaults and a wave of bankruptcies are ahead for U.S. companies.

… market rates on corporate bonds have continued to rise compared to Treasury yields for nine straight days, said John Atkins, a fixed-income analyst at IDEAGlobal.com. This trend is hitting non-investment grade bonds, or junk bonds, the hardest, but is occurring in investment grade bonds as well.

Bloomberg - Oct 28
Emerging Market Credit Risk Signals Test for IMF’s Resources

The cost of default protection on bonds sold by 11 emerging-market nations has surged near distressed levels, triggering speculation the International Monetary Fund’s ability to bailout countries may be stretched.

…“The resources of the IMF may not be sufficient for wider bailouts if needed,” said Vivek Tawadey, head of credit strategy at BNP Paribas SA in London. “If it can’t raise the money, some of the more distressed emerging markets could end up defaulting.”

Bloomberg - Oct 28
Home Prices in 20 U.S. Cities Fell From Year Ago

House prices in 20 U.S. cities declined at the fastest pace on record as foreclosures climbed before the credit crisis deepened this month.

The S&P/Case-Shiller home-price index dropped 16.6 percent in August from a year earlier, as forecast, after a 16.3 percent decline in July. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

The decrease in property values, which helped boost sales last month to the highest level of the year, will probably intensify in coming months as the latest tightening of credit markets threatens to dry up mortgage financing. Prolonged price declines may push even more houses into foreclosure, weakening consumer spending and the economy.

“There’s still quite a bit further for prices to go down, even though the volume has probably bottomed out,” William Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in a Bloomberg Television interview. “Prices will probably find a bottom sometime next year.”

Bloomberg - Oct 28
U.S. Economy: Consumer Confidence Drops to Record Low

U.S. consumer confidence fell to the lowest level on record in October as stocks plunged and banks shut off credit, raising the risk spending will collapse.

The Conference Board’s confidence index tumbled to 38, lower than forecast and the worst reading since monthly records began in 1967, the New York-based research group said today.

Forbes - Oct 28
IMF Has So Much Umpf

The International Monetary Fund is supposed to be the world’s lender of last resort, but disturbing questions were being raised Tuesday about whether it had all the money it needed to help the world’s most troubled economies in the wake of the subprime crisis.

The IMF’s first deputy managing director, John Lipksy, said on television that if the the world’s financial problems continue to grow, “we might think about whether we would need additional resources.” He added that the IMF was discussing that possibility with its members. “For now we have record liquidity,” he said.

BBC - Oct 28
Hungary to get $25bn rescue deal

Hungary has been granted a multi-billion dollar rescue package by the IMF, the EU and the World Bank.

The deal, worth $25bn (£15.6bn;19.6 euro), is intended to help Hungary cope with the ongoing effects of the world financial crisis.

It follows similar measures taken by the IMF to prop up the economies of Ukraine and Iceland.

Forbes - Oct 28
Pakistan Urged To Take IMF Money

LONDON - Pressure is piling on Pakistan to accept financial help from the International Monetary Fund, or face a financial meltdown.

WSJ - Oct 28
Argentina’s Pension Plan Presses On, Driving Down Markets and the Peso

Argentina’s leftist government pressed forward with its controversial plan to nationalize private pension funds, laying out investment guidelines for the funds it wants to seize and lobbying Congress to approve the proposal.

Taking over the $30 billion in pension fund assets will ease the cash crunch faced by President Cristina Kirchner’s government, but it has jolted investor confidence and triggered a dollar outflow.

Bloomberg - Oct 23
China’s Home-Sales Stimulus May Fail to Protect Economic Growth

China’s measures to encourage home sales aren’t enough to stop a cooling property market from dragging down growth in the world’s fourth-largest economy, said Credit Suisse AG and Standard Chartered Bank Plc.

The government yesterday trimmed costs, including mortgage rates, taxes and down-payments, for first-home buyers.

“This is the biggest property rescue package in China’s history, but it didn’t touch the two most critical areas that are dragging down the property market — property developers’ stressed cash flows and consumers’ expectations for further price drops,” said Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. “The measures won’t do the job.”

Our Take:

These news items don’t include important geopolitical issues relating to countries such as North Korea, Iran, Pakistan, and Venezuela that have the potential to cause market havoc.

This news also does not deal with rising unemployment, a likely weak Christmas retail season, probably poor Q4 earnings reports, and an entirely new team running the US government and the Treasury in January (3 months from now) with unknown and potentially surprising programs.

We certainly could be wrong, but all this doesn’t seem like were are ready to resume a sustained rise in market prices.  It’s commonly said that markets anticipate about six month in advance, but normalization of the situation seems farther than six month away to us.

SPY in October

SPY for 52 weeks

Richard Shaw
QVM Group LLC