Ask Rande

Top 1819. Aug 16, 1999 4:00 PM

» RandeS - dna,

dna,

I'm not so concerned with the divergence in the DJIA relative to S&P 500 because it's so explainable. Looking beyond the manifestation of the divergence to the roots, outperformance of the cyclicals relative to the growth stocks, that too makes sense. In a period of uncertainty, where the economy appears robust and the goldilocks scenario appears in jeopardy, gravitation toward value and/or stocks that would benefit from such conditions seems natural. The difficulty is in discerning the current trend from the longer-term fundamental trend. The solution to the growth vs. value swing is to own both through the Total Market Index. I know it's not sexy, but it works for me. The Dow and the S&P still tend to track one another rather closely over time, remarkably so. All the attention on both, especially the Dow, creates a lot of short-term noise that detracts from the big picture. Rather than worry about value vs. growth or Dow vs. S&P, I continually focus on the most important consideration of all -- do the prospects for financial assets remain favorable to all alternatives. The answer to me is yes. As Birinyi recently said, the bearish case for stocks is always more articulate than the bullish case. This is because the bears focus on the here and now (except for those who claim to know what will happen four, seven, and fifteen years from now to the day). Smart investors focus on the likely prospects six months or more down the road. If I wanted to bearish on financial assets, if it meant the world to me to be able to make a negative case, if I had to fish for reasons to say that we are headed for a fall, I couldn't if my life depended on it. Could it happen? Of course. Would I be willing to bet on it? No. The outlook remains favorable for financial assets IMO. That includes the propsects for a surprisingly negative CPI tomorrow (which I don't expect) and a Fed rate hike next week (which I do expect).

-- posted by RandeS

Top 1820. Aug 16, 1999 4:16 PM

» RandeS - Bill,

Bill,

Smart move. The wash sale rule say that a loss will be disallowed if you continue to own a substantially identical position within 31 days prior to or after your sale. Substantially identical means, of course, the same security. It could also mean a different, yet substantiall identical security. For example, if you sell SPY at a loss and purchase an S&P 500 index fund within 30 days that holds the same 500 stocks in identical proportions, you might have a problem with the IRS. Likewise, if you sell A shares and buy B shares within the prohibited time period, your loss might be disallowed under audit. Otherwise, different mutual funds are generally considered NOT substantially identical as they are distinct legal entities. For example, if you own XYZ emerging markets fund and have a loss position, you could sell that fund and buy ABC emerging markets fund on the same day at a different fund family without violating the wash sale rule. Excellent strategy if you want to maintain your exposure for allocation purposes, yet wish the government to share in your pain by giving you a tax break (so long as the ABC fund meets your requirements for fees, performance, and investment philosophy, of course). If you own a particular municipal bond issue with an unrealized loss, you can certainly sell that bond at a loss and buy a muni bond fund to maintain your asset allocation strategy while at the same time getting a tax break. Again, as long as the investment objective is met, an excellent strategy. If you were to replace the bond with another specific bond, you would want to be careful with regard to identical maturities, coupon, price, credit quality etc. in order to avoid IRS contention. Still, unless it's the exact same issue, chances are you'll be okay.

-- posted by RandeS

Top 1821. Aug 16, 1999 4:39 PM

» ron - CPI

Rande, Please claify your view on the cpi number. Are you saying negative as in a low number or negative as in a high number and the market's reaction will be negative or low number and the market will be positive. (does that make sense) anyway thanks,

-- posted by ron

Top 1822. Aug 16, 1999 4:56 PM

» RandeS - Ron,

Ron,

These numbers are usually best viewed relative to expectations, and not on an absolute basis. A week or so ago, I was seeing consensus estimates for the nominal CPI at .4% and the core at .2%. Now, the street seems to expect .2% overall and .1% at the core. This increases the pressure for a favorable report. "Negative" to me would be .4% or higher overall and .3% or higher at the core. Coming in at the current expectations would be dandy. Coming in at .1% overall and unchanged or better at the core would be fanatastic. The trouble is, as April so vividly demonstrated, the PPI is not a good barometer of what the CPI might hold. As favorable as last week's PPI was, it's history. To tell you the truth, Ron, I'm nervous over this one given the market action on Friday and today. I think we might have overdone it a bit at this stage. I'm not expecting a big negative tomorrow, but the market has set itself up for a bad reaction if that's the case. Have to be prepared to ride the short-term wave. Longer-term conviction remains no matter what the report. FOMC rate hike appears a done deal in any event. Just don't want to see continued edge-of-the-seat nervousness until next month's report, if you know what I mean. A favorable report tomorrow, followed by a Fed increase will provide ample reassurance that the Fed remains ahead of the curve. The bond marekt will like that.

-- posted by RandeS

Top 1823. Aug 16, 1999 5:01 PM

» ron - rate hike factored in mkt?

Rande, Do you think the market has digested a rate hike? It seems like it is pretty much a done deal according to all analysts.

-- posted by ron

Top 1824. Aug 16, 1999 5:13 PM

» RandeS - Yes indeed, Ron.

Yes indeed, Ron. A 25 basis point hike appears fully discounted. The question is open with regard to an additional hike come October. I'm thinking not, but no clear picture, and it's bedeviling.

-- posted by RandeS

Top 1825. Aug 17, 1999 2:59 AM

» Phyllis - Thank you

Rande:

Thank you for your advice. I think I will go see the Schwab people in Sacramento tomorrow and transfer all our IRA's over to them. Since I DCA into the Vanguard Total Stock Mkt Fund I might as well leave that with Vanguard. My money market is also at Vanguard and I've been looking at that tax managed fund you recommended in the past. I also DCA into TIAA CREFF. These are personal monies so may leave them independent, but I'm convinced the supermarket idea for the IRA's is worth pursuing.
Also convinced that I want to simpfly things. Am about ready to go to the active-passive portfolio Bob recommends and sell INTC, MRK, PFIZER, LU, and CPQ (long time holdings) and deal with the cap gains. Too many pieces of paper to track.
Do you use Schwab for your personal money brokerage acct too?

Phyllis

-- posted by Phyllis

Top 1826. Aug 17, 1999 4:43 AM

» Thruhiker - GNMA?

Hi Rande, when it comes to the fixed income portion of investments, it seems that *most* people invest in GNMAs. Why the attraction to GNMAs rather than, for example, Vanguards Intermediate Bond Index Fund. (Or for that matter the Total Bond Index.) Do GNMAs pay a bit more do to the ever present refinace risk? Thanks, Steve.

-- posted by Thruhiker

Top 1827. Aug 17, 1999 5:27 AM

» RandeS - Phyllis,

Phyllis,

Yes, I use Schwab for my main personal account, along with IRAs for wife and me. Have been with Schwab since mid-eighties. Tranferred all of my "One Source" funds from other families long ago into Schwab, but left Price and Vanguard alone. I like your idea of cutting down on overall holdings in a further effort to simplify. Over the years, I've owned fewer and fewer funds/stocks and can imagine a day when I will own a balanced portfolio consisting of only three funds -- Total Market Index, Total International Index, and a solid intermediate-term bond fund.

-- posted by RandeS