Ex-Food, Ex-Energy, Ex-Americans

I would have sworn I saw a headline in the online Journal yesterday trumpeting "IBM buyback and $100 oil boost stocks!" Huh? If IBM's management wants to boost the share price, one can hope that they are doing it for some reason other than compensation tie-ins, but how does oil over $100 boost stocks? The story, which I glanced at, seemed to indicate that it helped oil stocks. I suppose since "core" inflation is ex-food, ex-energy, it makes sense to ignore the potential effect of energy costs on other stocks. NOT. It does mean that I've lost about 8% in a week on my DUG ETF, despite the fact oil has barely budged in price. Unfortunately, a lot of speculators have decided their portfolios should be ex-energy shorts, so DUG has decoupled from the oil price.

But my real reason for posting today was to link to the written testimony of Nouriel Roubini in front of the House Financial Services Committee. Nouriel does a terrific job of summing up the way many of us have felt about the economy, and in specific the housing market, for many years. The FED can't manage an economy out of a housing, equities and debt bubble just by lowering away on the funds rate. All they can do is temporarily prop up the stock market, giving the short term player and managed wealth a a chance to get out of the way before all the long term retirement account holders get burned.

As a citizen of Massachusetts, I'm seeing the beginnings of the negative selection in citizenry caused by the health mandate. Negative selection is a term used in the insurance industry to describe the inevitable consequences of a policy that encourages people who will derive a financial benefit from a decision taking that decision, as in moving to Massachusetts for free or heavily subsidized health insurance, while those who carry the penalty of the decision opt out. I'm actively planning a move to neighboring New Hampshire this year, I've had all the Massachusetts communism I can handle, but I don't have any intention of joining the ex-Americans, like many of our corporations that flee to tax havens. But I'm sure as the bills for the future pile up on young people entering the workforce, some negative selection of an ex-American character will occur on a national basis. Why should they hang around for "One Nation, For The Old".

Shorting Oil Over $100 A Barrel With DUG ETF

Last year I made a stupid mistake, buying the DUG ETF by mistake when I wanted to short the DOW. By shorting oil accidentally, I lost $500 in a couple days, figured out I'd bought the wrong ETF, and swore I would never short oil under any circumstance.

But oil closed over $100 a barrel for the first time yesterday, despite the fact that the winter heating season in New England is almost over, and oil inventory is actually rising. I could see gasoline continuing to go up due to refinery issues and the summer driving season, but with the recession closing in on us, I don't think oil is headed much higher for the time being.

So I bought 100 shares of DUG to short oil, getting it around $10 cheaper than it was priced when I bought it by mistake. Due to the 2X multiplier (DUG is an ultrashort fund), if oil goes back down to $90 and I sell out, I'll make back my earlier loss with a little to spare.

Could speculators keep the price of oil moving higher, despite the basic supply and demand equation? Sure, speculators can drive the price of anything up or down if they throw enough cash at it, or against it, but eventually they run out or cash out, and I'm guessing that $100 oil is a psychological barrier for a lot of them. If it's not, I'll take another bath:-)

Why Is My IRA Or 401K Losing Money?

I like checking my server stats to see why people visit various pages on my site, and this morning, I saw a visitor came to this blog after asking the question:

"Why is my IRA losing money?"

It's a darn good question, though a search engine if probably the wrong place to ask. Your IRA is a personal retirement account, so what the money gets invested in is under your control. If you gambled the money on equities that lost value, your IRA loses value. If you had a 401K, you'd be much more limited in what investments you can make, but you can lose money in a 401K just as quickly as in an IRA.

If you talk to most Americans about the stock market, you'll hear over and over again that the market returns 10% a year. For a while back in the late 90's, people liked planning on 12% or 15%, but 10% was the long term figure. The problem is twofold. First, I believe the really long term figure for total return is closer to 8%, and that included dividends, back in the day when all real stocks paid real dividends. That's just not the case anymore. The other problem is to get a long term average, you have to have a number of bad years after a number of good years.

So today, if you pull up a chart of the S&P 500, perhaps the most popular and most sensible holding in IRA's and 401Ks, you'll find that it's been returning about 4% a year over the last 10 years, maybe 5% with dividends thrown in. If you only go back as far as the summer of 200o, you'll find that the S&P 500 has just got back to break even with that date, ie, zero return. So it depends a little on the exact dates, but you can say pretty safely that bonds (think PIMCO) have outperformed stocks over the past ten years, which is a bit of a shocker.

The funny part is that many financial "experts" at large companies are frantically trying to persuade their employees to get their 401K investments out of low returning bond funds and put them into the stock market, since without a higher return, they won't have enough to fund retirement. Of course, those "experts" are stuck in the world of 1990's bubble returns, and don't think America can possible go the way of Japan. The Japanese market peaked in the late 1980's and is currently at around one third of that peak value. So, if your IRA or your 401K is losing money, you better study up on your options, but not stock options, which are one of the limitations on retirement accounts. The government wants you to loose your money through managed speculation, not personal hunches.

Too Late To Buy TIPS ETF?

Last November I was looking to park my IRA in something other than the stock market while traveling. I ended up with the Lehman Short Term Bond fund (SHV) because I couldn't find an inflation protected ETF. Apparently, I didn't look hard enough. Lehman markets the iShares TIP, which has been around since 2003 as a tracking fund for Treasury Inflation Protected Securities. When I made my big move into SHV, it was around $110.15. Now it's around $110.10, and has been lower in the interim. Good thing it pays a little interest. If I'd bought into TIP at the same time, I could have gotten it for $106, it's now around $107, but was much higher in the interim.

A year ago, TIP was down under $100, so it's up over 7% on the year, which is pretty good for an investment that may let you sleep better. I say may, because if I'd bought TIP in early 2005, when I was sure the economy was teetering on the brink, I'd have paid $107 and watched my investment fall 10% over the next year or so. So my conclusion is, if you really want an inflation protected security, you have to buy the security, not a fund or an ETF. As usual, my conclusion is that the Fed wants to turn us all into speculators for the good of Wall Street.

The base interest rate for TIPS at the last treasury auction turned out to be 1.75% for the twenty year and 1.625% for the ten year on January 31st. Other than that, you're counting on the CPI-U to do a fair job of modeling inflation, which it doesn't, so they can adjust the principal value of the underlying security every six months.

I thought a lot about that and the tax implications of owning TIPS direct, and decided to by some shares in an agricultural ETF instead. It's another Powershares Fund, the DB Agriculture Fund (DBA), I was attracted to the symbol since I'm a DBA myself. In the end, I'm just hoping that housing prices fall faster than inflation eats into my principal. That's what I call saving for the future!