Quantitative Easing part 2 (or QE2) is the Federal Reserves attempt to stimulate the economy through the printing and purchase of roughly $600 Billion dollar's in bonds. The Fed has two primary responsibilities and that is achieving maximum employment and price stability. So we've all been watching closely as I'm personally curious as to how this latest experiment will turn out. Of course, if you're the Fed you probably don't want to hear me calling it an experiment. This is why the discussion of the Fed's actions have been much like a prize fight. There are many economists that have pulled out the punching bags and are calling the Fed's actions a waste of money, devalues the dollar, and wishful thinking. Oddly, the Fed has openly punched back and noted that their actions are to jump start a stagnating economy which continues to lead to high unemployment and very low inflation.
Well the Fed's buying has begun and I have honestly been paying attention to the war of words a little too much. I got a little jittery as their has been more volatility over the last few weeks and I got to portfolio watching. But at the end of the day, I believe the Fed will get what they are looking for and that is more velocity. I think the move is actually to get the average investor that has been hedged (like me) or burned (like many) to move from their large bond positions back into stocks. As you have seen my writings here I believe that this is the gradual approach to take. I don't think you go crazy and just remove your bond positions but you begin to reallocate away from this great trade over the past few years. The other thing that may happen with more money in circulation is higher inflation. Well I doubt that will have a serious immediate action because if you're still thinking like me I am waiting for retailers to continue to drop their prices or they aren't getting my dollars. If I have this perception, many others do and the threat of inflation is real but not coming right away. Note...if it does we are slowing building a portfolio that has exposure to TIPS and commodities which will do well against inflationary pressures.
Note: This article was started in Nov and finalized on Dec 09
Showing posts with label Treasury Inflation Protected Securities. Show all posts
Showing posts with label Treasury Inflation Protected Securities. Show all posts
Sunday, November 21, 2010
Wednesday, October 08, 2008
Dark Knight ~ The Economy
Or should I saw dark nights and days are hovering above the economic horizon (the only idiot that can't see this is Larry Kudlow...who thinks this is just a blip in an economic "Goldilocks" rally) What do I mean by this...well I won't act like the politicians and keep telling you about my record on how I got this right (but if interested see my last post)! Because at this point in the game, pats on the back won't do because I believe we are in a seriously bad spot right now in the economy. I am going to continue to break course from my usual buy and hold mantra and say that we are in turbulent times and with the actions taken by the federal government make it difficult to take a historical perspective and apply it to today's situation. The fact of the matter is things are changing very rapidly...in ways that we haven't seen before and even your smartest people are having trouble getting this right.
Backdrop:
And I know that you are often told if you are young investor then just weather the storm and it will be alright. But as a 20 something that has seemed to be ahead of the curve of the direction of this unbelieveable storm that is now upon us, my interpretation is to head to safer ground until the storm passes. Why because we've been ahead of the game a few times now: I have written posts using logic and my very basic understanding of Econ 101 to identifiy the potential for a housing bubble...then we were ahead of the curve when we combined the everyday realities ofsoaring energy and food prices to point out that the average person on MAIN STREET (i hate this term) was already feeling the effects of inflation!
The Federal Reserve finally caught on and to their credit took some action to combat the inflationary pressures of soaring food and energy prices, however, one problem was still left unaddressed and that was the housing bubble. Limited action was taken to help main street solve the mortgage crisis which spilled over into Wall Street. Wall Street felt the effects through deteriorating mortgage backed securities and a rising waves of credit default swaps (basically insurance to investor when toxic securities began to crumble). You may call it karma but our inability to help main street has seriously crippled wall street. In my last post, I tried to highlight this problem and indicate that I believe that even with a much needed bailout package we haven't truly explored all of our options to begin to resolve this crisis and a 360 degree approach my be needed. To make a long story short, I believe the Fed now sees the need for some of the points that were raised in the last post, such as stepping in and being an intermediary for short term lending to companies (basically being a bank & lending companies money b/c the banks don't to and can't do it right now).
If you weren't aware companies are having trouble getting short term loans (for supplies, payroll, etc) and many get their loans through a market called commercial papers. We have previously raised a point in the previous post that the Fed may need to "act" as a direct lender and today, the Fed, concerned that the commercial paper market has dried up look to breathe life back into this market by basically providing companies with short term funding.
Current Environment:
I believe the storm is just setting in because of the aggressive and unprecedented steps that the Fed (some listed above) has had to take along with the most recent words from the Fed Chairman, Ben Bernanke. I know you don't think words are important but when one of the most financially informed persons on the earth believes that the economic outlook has "worsened", economic activity is likely to be "subdued", and the financial turmoil may "lengthen weak economic performance" we must all take heed. I am hear to tell you that the Fed Chairman never wants to scare us but he must paint an accurate picture...and when he uses words like subdued economic activity then we are probably going to experience some serious economic pain for a period of time.
Supporting Evidence:
~ Fed Chairman's recent words
~ Today's global rate cut by the US and other major central banks
~ Commercial paper markets (corporate short term funding) has dried up and the Fed has announced that is will step in and create a market to revive this much need source of funding
~ The economic slowdown and financial crisis is spreading GLOBALLY
~ The bailout will take time help financial firms solve their liquidity problems
~ Rate cuts along with other things historically push INFLATION higher
Problem Solving (Only my recommendation):
~ If you are an older person nearing retirement, you are in a very difficult situation and I don't have many solutions here
~ Middle aged people and people with children: you have a few other responsibilities that will need your immediate attention, so capital preservation will be very important (see below).
~ Young people, I am going against the grain and telling you to be concerned and focus on capital preservation also! Move 401K balances, IRAs and brokerage accounts into safer grounds and due to inflationary concerns that appear to be surfacing I would reallocate your portfolios in this order (if possible):
Backdrop:
And I know that you are often told if you are young investor then just weather the storm and it will be alright. But as a 20 something that has seemed to be ahead of the curve of the direction of this unbelieveable storm that is now upon us, my interpretation is to head to safer ground until the storm passes. Why because we've been ahead of the game a few times now: I have written posts using logic and my very basic understanding of Econ 101 to identifiy the potential for a housing bubble...then we were ahead of the curve when we combined the everyday realities ofsoaring energy and food prices to point out that the average person on MAIN STREET (i hate this term) was already feeling the effects of inflation!
The Federal Reserve finally caught on and to their credit took some action to combat the inflationary pressures of soaring food and energy prices, however, one problem was still left unaddressed and that was the housing bubble. Limited action was taken to help main street solve the mortgage crisis which spilled over into Wall Street. Wall Street felt the effects through deteriorating mortgage backed securities and a rising waves of credit default swaps (basically insurance to investor when toxic securities began to crumble). You may call it karma but our inability to help main street has seriously crippled wall street. In my last post, I tried to highlight this problem and indicate that I believe that even with a much needed bailout package we haven't truly explored all of our options to begin to resolve this crisis and a 360 degree approach my be needed. To make a long story short, I believe the Fed now sees the need for some of the points that were raised in the last post, such as stepping in and being an intermediary for short term lending to companies (basically being a bank & lending companies money b/c the banks don't to and can't do it right now).
If you weren't aware companies are having trouble getting short term loans (for supplies, payroll, etc) and many get their loans through a market called commercial papers. We have previously raised a point in the previous post that the Fed may need to "act" as a direct lender and today, the Fed, concerned that the commercial paper market has dried up look to breathe life back into this market by basically providing companies with short term funding.
Current Environment:
I believe the storm is just setting in because of the aggressive and unprecedented steps that the Fed (some listed above) has had to take along with the most recent words from the Fed Chairman, Ben Bernanke. I know you don't think words are important but when one of the most financially informed persons on the earth believes that the economic outlook has "worsened", economic activity is likely to be "subdued", and the financial turmoil may "lengthen weak economic performance" we must all take heed. I am hear to tell you that the Fed Chairman never wants to scare us but he must paint an accurate picture...and when he uses words like subdued economic activity then we are probably going to experience some serious economic pain for a period of time.
Supporting Evidence:
~ Fed Chairman's recent words
~ Today's global rate cut by the US and other major central banks
~ Commercial paper markets (corporate short term funding) has dried up and the Fed has announced that is will step in and create a market to revive this much need source of funding
~ The economic slowdown and financial crisis is spreading GLOBALLY
~ The bailout will take time help financial firms solve their liquidity problems
~ Rate cuts along with other things historically push INFLATION higher
Problem Solving (Only my recommendation):
~ If you are an older person nearing retirement, you are in a very difficult situation and I don't have many solutions here
~ Middle aged people and people with children: you have a few other responsibilities that will need your immediate attention, so capital preservation will be very important (see below).
~ Young people, I am going against the grain and telling you to be concerned and focus on capital preservation also! Move 401K balances, IRAs and brokerage accounts into safer grounds and due to inflationary concerns that appear to be surfacing I would reallocate your portfolios in this order (if possible):
- Gold (as fears continue this is a global safe house and great inflation play)
- Treasury Inflation Protection Securities (this security give you the Treasury yield and accounts for the rise in inflation)
- Treasury and Money Market Securities (safest investment out there, but inflation will eat away at your savings, eventually)
- Bonds (even bonds have lost money but obviously a better option than stocks)
- Smart Dividend and Value Stocks - At this point I am recommending this only for your brokerage account and don't go for the highest yielding firms b/c they may be the first to cut their dividend (i.e., Bank Of America), which means that stock will then fall sharply. Look for the the stocks that will continue to pay a dividend and increase their payments (Kinder Morgan - Jim Cramer pick, Enterprise Partners - Urb pick, GE - Urb pick are names that will help you pay yourself during this tough economic period)
I'm Out!
Wednesday, September 03, 2008
Which Direction Is Your Money Moving...
Okay here is the deal at least in my view, NOTHING HAS CHANGED. I am still pretty bearish on the overall market. I believe that it will at best move sideways for awhile. So this calls for a tactic that most people are scared of and that's staying on the sidelines. Yep, just sit back and wait for this collapse of the market to play out. I am still screening stocks but at this point there is so much scrutiny involved that I might as well be sitting on the sidelines myself. I have already told you a few months ago to prepare for battle by repositioning your retirement accounts (401K and IRAs) and brokerage portfolios for the long winter. Some of you may have listened and others just simply ignored my instructions. I have two 401k plans and in my older plan I sold my gains and moved into a defensive position: a money market account. My IRA account offered a better hedged and I moved my gains into Treasury Inflation Protected Securities or TIPS. They offer the current Federal Treasury rates, which are not big returns, but add the rate of inflation to your returns. And its no secret at this point that INFLATION has been picking up for a long time now. Just ask yourself, how much has the price of goods you buy gone up and I bet across the board...you say enough to feel it when you shop. At this point its about wealth preservation until things get better.
Those accounts had gains in them so I moved to safer ground as the markets decline plays out. However, the other scenario is my current 401K plan is dropping like Britney Spears career, but I have adjusted my holdings. And this is why I am not panicking...b/c I am still young. If you didn't have gains or are in the red...keep buying in as prices go lower because you are able to buy more shares than you were before. Lastly, in your stock portfolio you better have some dividend stocks to ride out this drought b/c they will create a floor if your stock begins to decline. The only stocks I am adding to my portfolio at this time are ones that are hitting my superman price! Remember that concept from earlier posts! I always create attractive levels that are difficult to reach and when they get near those targets I look to add positions.
I am following another set of stocks this month:
Electro Scientific Industries (ESIO) - This is a technology play that reached, "Superman" status...as Soldier Boy would say. I was patiently waiting for 13.80s after evaluating charts and buying patterns and the market has pushed this stock down to these levels. I bought small amounts at this point and will watch it closely.
Convergys (CVG) - Bucked the trends recently and is moving up nicely. Again to be honest its so difficult to not chase this stock. I liked it at the levels of mid 14s but it is moving. I will wait and again throw out the really great price of 12.90s as a Superman price.
CSX Corp (CSX) - If you couldn't tell I love the railroads and CSX has been on my eye as private equity firms continue to pressure managment to improving returns. Although shrewd, I love to hear that type of action because they often lead to the catalyst that we are looking for to move a stock. Not to mention, I already own BNI and I still love this industry for moving all those commodities that the world needs. And they have pricing power when gas is high and BENEFIT as gas prices come down to help improve margins. Jump aboard the CSX express. I love the lows today of 55 and am watching this closely. I don't have a superman price but stay tuned.
Disclosure: I opened a position ESIO
Those accounts had gains in them so I moved to safer ground as the markets decline plays out. However, the other scenario is my current 401K plan is dropping like Britney Spears career, but I have adjusted my holdings. And this is why I am not panicking...b/c I am still young. If you didn't have gains or are in the red...keep buying in as prices go lower because you are able to buy more shares than you were before. Lastly, in your stock portfolio you better have some dividend stocks to ride out this drought b/c they will create a floor if your stock begins to decline. The only stocks I am adding to my portfolio at this time are ones that are hitting my superman price! Remember that concept from earlier posts! I always create attractive levels that are difficult to reach and when they get near those targets I look to add positions.
I am following another set of stocks this month:
Electro Scientific Industries (ESIO) - This is a technology play that reached, "Superman" status...as Soldier Boy would say. I was patiently waiting for 13.80s after evaluating charts and buying patterns and the market has pushed this stock down to these levels. I bought small amounts at this point and will watch it closely.
Convergys (CVG) - Bucked the trends recently and is moving up nicely. Again to be honest its so difficult to not chase this stock. I liked it at the levels of mid 14s but it is moving. I will wait and again throw out the really great price of 12.90s as a Superman price.
CSX Corp (CSX) - If you couldn't tell I love the railroads and CSX has been on my eye as private equity firms continue to pressure managment to improving returns. Although shrewd, I love to hear that type of action because they often lead to the catalyst that we are looking for to move a stock. Not to mention, I already own BNI and I still love this industry for moving all those commodities that the world needs. And they have pricing power when gas is high and BENEFIT as gas prices come down to help improve margins. Jump aboard the CSX express. I love the lows today of 55 and am watching this closely. I don't have a superman price but stay tuned.
Disclosure: I opened a position ESIO
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