I updated my performance numbers for June as well.  Sorry for the delay.

http://www.cnbc.com/id/100907635

Stories like this highlight the "problem" with the current US economy.  Inefficiencies are created by laws like the Jones Act.  Inefficiencies do not have to have any moral value positive or negative in my view, but they can have an effect on prices.  The Jones Act serves to protect an industry (US shipbuilding) at the expense of consumer prices.  I find it funny how the supporters of the repeal even talk about how it will create jobs.  Perhaps in some industries, but clearly US shipbuilding would suffer.  And perhaps, it should.  In unfettered capitalism, the destruction of one industry would spawn other opportunities and that has been one way the US has grown to be the strongest economy in the world.

So, in the end, I'm all for becoming more efficient.  I would also suspect most Americans would be as well.  There can be no denying though, that, at least in the short term, in the process of becoming more efficient, there will be losers. The American worker is one of those.  Structural unemployment in the guise of improving efficiency will put a cap on economic growth in the short term.

The Detroit situation is also telling.  We have a lot of infrastructure that is underutilized.  Idle factories, idle cities!  The economy has to work through that which also puts the brakes on growth.  I am watching the muni situation closely as there will be some precedents set on the handling of who takes losses.  Unfunded liabilities caused by defined benefits to a population that lives longer with every medical breakthrough is a crushing load on the current taxpayer.  I believe that there will have to be haircuts taken by said benefits earners.  Tax burdens are ever increasing without commensurate increases in services - why? Because the population earning defined benefits keeps getting larger.  In the private sector, companies switched to defined contributions a long time ago, but governments have not and until that changes, we will be in this conundrum.

Good companies will continue to become more efficient and create earnings for their shareholders.  Perhaps not a lot of top line revenue growth, but earnings.  I believe this will be good for stocks and I suspect we will come out of earnings season with higher prices.

I like IWM (smaller cap stocks) in addition to the solid dividend paying larger cap names.

Hello Sports Fans,

I'm baaack!

As I've expected/hoped, the market finds a way to keep muddling along.  There are some substantive changes, though.  For one, the sizeable negative correlation between stocks and bonds has broken down to almost zero.  Put another way, the "fear trade" that is often discussed is not to go into bonds.  Investors seem to have lost an appetite for US treasuries at these yields.

I think this is driven by a desire to "get in front" of the market - i.e. time it, but I am not convinced this is a good idea.

I still have not seen any evidence that the economy is heating up in any way.  I think the developments are positive, but to me that only means some of the really risky scenarios are off the table, for now.  It does not mean we are going to be growing at 3-5% any time soon.  I suspect we will be in the 1-2.5% range for a while as the employment picture still remains muddy and we are undergoing a structural shift upward in efficiency.  While this will be good long term, short term, there will be higher unemployment and this will serve to temper any gains for a while.

Thus, I find myself still liking bonds at these levels.  The 10 year bonds are now somewhat attractive as well as the long end and probably have less risk.  The funds are riskier than the physical bonds because the bonds maturity is always getting shorter whereas the funds tend to stay constant.

In addition, the ETF's like MHN, JTP, VTA seem very attractive to meas they offer very high yields which will protect them if rates start rising and they are trading at discount which also helps.  Even when stocks are rallying, I would not sneeze at 7-10% pre-tax returns, so I do not understand the current price levels except under that maybe investors are going back to cash and taking risk off the table.

If that is the case, investors are woefully underinvested.  Stocks continue to perform well in the real world.  I am a believer in stocks that pay their owners and run efficiently.  There are many examples of that.  Fluctuations in the stock price don't matter to the company.  They do provide buying opportunity. Keep that in mind as things gyrate in the coming months.

The market tends to shift focus as if it had ADHD.  Remember a few months back, AAPL was gyrating 5-10% in no time based on nothing concrete.  Now, it barely moves.  Currently it is bonds that are the focus and they change by 1+% on very little.

Volatility is transitory.  Stay with solid companies and use volatility to establish good entry points.

On a side note:

Spending less is a lot easier than finding ways to earn more, so here is a link I found right on target.
I especially like the delaying a purchase advice.  It works like a charm.

URL:

http://news.morningstar.com/articlenet/article.aspx?id=603395

  

Investors are a fickle bunch.  Many were decrying the lack of a buying opportunity as the market took off on a one way steep ramp up.  Well, we have gotten a bit of a pullback and then it's panic time (when every asset class goes down, I define that as a panic).

It is important to pay attention to the numbers.  The economy grew at 1.8% in the first quarter versus an expected 2.4%.  Some are dismissing it, but why?  I believe this is more evidence that we are not growing anywhere near a level where the Fed will stop QE in any shape or form.  Asset purchases will continue and rates will stay low for a long time.  The curve steepening (long rates rising more than short term rates) will bring out buyers of long term securities soon enough.

That said, it will be a bumpy ride and if the drawdown caused too much volatility in your portfolio, look to sell portions/all of any positions that you don't love when we get a rally.  I can understand why investors feel the market is rigged against them.  It can certainly feel that way.  Look at the movement in LO yesterday where it had an almost $3 range with no real news.  Very difficult sledding for sure.

I am focusing on value and right now the most obvious are the closed end funds trading at significant discounts.  This is true almost across the board, so pick an asset class, comb through the CEF connect website and find a nugget!

http://www.cefconnect.com/Default.aspx

Not much to add here.  Market is speaking with a wholesale repricing of financial assets.  Stocks, bonds, there is nowhere to hide.

Muni's getting absolutely pulverized.

I am not selling anything here and just looking to buy opportunistically.
S&P about 6.4% off of it's highs.  I think it is overdone, but it is difficult to stand in front of this train heading downhill.  That said, there are deals if you are willing to provide liquidity.  I bought a little JPS which is now at about a 12% discount.

The yield curve is steepening with the long-term TIPS trading now at 1.4%+ real yield.  I would not be surprised to see this go even higher as I believe the negative real yields are an anomaly.  At 2% I believe these to be screaming buys, so even at this level I like them.

10 year TIPS are at about 0.5% real yield which is still very low.

All that said, I think bonds are good value here as growth will be hard to come by.  China is not giving us any warm fuzzy feelings.  In a low growth world, bonds will do well.

Finally, if anyone is keeping score with the AUD (australian dollar) there has been a huge move our way down to 92 area and I would not be a pig about it and cover the short around here.  Some believe this can keep going below 80 and maybe it would be a good hedge against a world value destruction scenario as AUD is heavily dependent on China.

Updating a favorite graph of mine and adding some data:

The first shows the spread between Earnings yield and 10 year Treasury notes.  The second is the absolute levels of each (Blue is the prospective earnings yield and yellow is the 10 year treasury rate)

Both are since 1961 (of no particular relevance).

If you graph the spread versus future S&P 500 returns you get a statistically significant positive relationship - higher spread, higher S&P return.  

Given that we have been high for the last few years, it should be no surprise that the S&P returns have been good.  Looking forward from now, we have a spread higher than 5% so stocks still look good.  Perhaps not so good are the bonds.  I think the average spread over time is around 2+%.  Since we are over 5%, then it stands to reason this will come down some day.  The second graph shows that probably the more likely way the spread will "normalize" is by treasury yields going up.

I think that is what we are seeing in the market right now.  The proper trade would be buy stocks/short bonds but that is a very "hedge fund/absolute return/somewhat risky" strategy.  For long term investors, the proper course is to overweight stocks and keep bonds on the lower end of their weight ranges.  

My caveat would be that while rates are low and probably should go up at some point, it would be more economically rational for rates to go up because the economy is picking up.  We have not really seen that.  So, I'll stay with my bond exposure (MHN, TLT, PFF and others) for now and wait to see some actual growth surface before I quit it.

I sold 1/3 of my RAX position in keeping with my strategy of using the up moves to sell things that are not your favorites.  Better to have a few great positions than many that are unloved (and thus not analyzed properly).

I also continue to buy JPS and JTP.  In absolute terms, the yield is excellent and risks are low.  I am certain that in this type of economy, the coupon/dividend will be good.  The risk is a quick up move in short term rates.  Here is a quick "back of the envelope" analysis of the situation.

Leverage amount(%) 28%
Borrowing rate 1.2%
distribution rate = 6.9%

portfolio yield= (dist+borr * levg)/(1+levg)
                      approx  5.65%

A 1% point rise in borrowing rates will mean that distribution yield will go down by about 0.3% to 6.6%

In all, I think you are compensated for taking the risk of rates backing up, so I am adding here.  The kicker is that one is buying the assets at a 8+% discount.

Another downside would be liquidity as it is difficult to put on or sell a big position without moving the market against you.  So some of the premium in yield is compensating for that aspect.

http://seekingalpha.com/article/1498752-the-death-of-bonds-is-greatly-exaggerated?source=intbrokers_regular

I like this post.  It is well reasoned and urges calmness in the face of volatility.  All good traits.

I agree with the conclusions as well.  There has been no evidence that the sell off in bonds is due to stronger economic growth prospects or inflation expectations.  I remain with the view that there are lots of good buying opportunities right now - loans (VTA or VVR), preferred stock funds (JPS, JTP) munis (MHN) as well as any favorite dividend stocks that might have been sold off prematurely.  Utilities may be in this group as well XLU, but I do not have any at this point.

Up days like today are good for trimming any unloved positions and then waiting to buy into your favorites.  It is probably best to "leg" this spread - sell, then wait until a better price and buy.  There is risk in this approach, but we have been seeing enough volatility to warrant it.