Ask Rande 10,000+

» Centigrade233 - The Rational Bear Case

Naturally my opinion is no better (or worse) than any other, but I'd like to outline my reasons for moving mostly to cash recently, even though I actually bought equities on the first market day after the Twin Towers attack.

I see both short term and long term reasons for a cautious approach to investing.

I don't understand the view that stocks are "fairly valued" or that "the bad news is already priced in." It is at least a possibility that there are other shoes yet to drop that will adversely affect stock prices. A cautious investor must at least consider the possibility that we are losing a two front war.

When pundits began comparing 2000/2001 to 1973/1974, I originally laughed. I am old enough to remember the 1970's when it was considered a social faux pas to mention the stock market in mixed company.

Back then, with high inflation, preferred investments were real property and commodities. Investors borrowed money to buy real property, counting on inflation to pay the debt while increasing the value of real property. That won't work today. The only time I know about when we had a stagnant economy coupled with low (or negative) inflation was in the 1930's.

Today, investment ideas are few and far between with the economy contracting and inflatinon non-existant. I have never been a perrenial bear. To the contrary, I look for any excuse to be fully invested. With much deferred income, shorting is not an option.

Having lost 10% of my capital since January of 2000, I'm now in capital preservation mode. Today, the risk vs. reward is as bad as I've seen it in my lifetime.

We all know the market makes its best gains from November through April. We also know the market rises in mid-term election years. I believe the market may be planning to teach a lesson to those who count on such historical patterns.

Certainly stock values must grow along with the inevitable long term growth of the US economy. But, has anyone actually ever met a long term investor who was willing to ride stocks down during a multi-year pullback? There is still a lot of pent-up selling pressure.

I'm not predicting anything, but I fear we may in for several more years of stock price contraction. This should not be surprising following a period when stock valuations had discounted not only the future, but the hereafter as well.

We over-did things on the upside, and I fear stocks won't rebound until we over-do things on the downside also. We may need another 1982 to attract investors back to the market. This may not happen in my lifetime.

-- posted by Centigrade233

Permalink Print Discussion Join the latest discussions

» Kirk - Re: Re: Re: Emergency cash stash.

In response to message posted by pjstack:

That's why I look at I Bonds as interest-baring travelers checks, rather than an investment.

Good way to look at them. I'm 44 BTW so I have a long time before I really need to think about not working.

I'm becomming a bigger fan of "simplicity" as I've learned how much other great stuff you might want to do if retired while not watching a stock and bond portfolio daily. Many go to mostly fixed income when they retire but it is not a "do once" activity as they always have to watch for risk adjusted yield so they can make their money work for them. Having a certain lifestyle from having 50% of your income invested in 2-5 yr treasuries at 6% in 2000 changes a good deal when those treasuries get reinvested at 3.6% as they come due... that is NEARLY a 50% cut in income and yet inflation marches forward, granted at a low rate. http://stockcharts.com/charts/YieldCurve...

I've been thinking that iBonds might make great gifts since you can decide how to title them... especially as a way to help fund a nephew or niece's college education.

-- posted by Kirk

Permalink Print Discussion Join the latest discussions

» dewam - Re: Re: I think I got the answer

In response to message posted by Rande:

Rande, I think you have it wrong. I believe you receive the 5.92% for the 6 month period following the issue date of an October bond. As quoted below, your rate period begins on the issue date, and a new rate period begins every 6 months after that. Den

http://www.publicdebt.treas.gov/sav/savr...

Your Series I bond earns interest at a variable composite earnings rate. The rate changes each time your bond enters a new rate period. Your bond’s first rate period begins on its issue date. A new rate period begins every six months after that. For the full six months of each rate period, your bond earns interest at its most recently announced composite rate.

-- posted by dewam

Permalink Print Discussion Join the latest discussions

» Kirk - Re: Re: Re: I think I got the answer

In response to message posted by dewam:

Rande, I think you have it wrong.....

Who the hell designed these things? The people who wrote out tax code?

one reason I decided to not buy was I like simple things that I can put into equations to do my own risk/reward analysis. I understand how normal bonds work but these hybrids are really weird... and I was unable to assign what interest rate one gives up to get a more stable rate.... the problem was calculating the actual rate! Rande's formula sure seemed simple enough to follow.. .now you say it doesn't apply?

-- posted by Kirk

Permalink Print Discussion Join the latest discussions

» Rande - Re: Re: Re: I think I got the answer

In response to message posted by dewam:

Dewam,

You could be right. The table for the latest release shows the following current earnings for "Issue Dates" 5/2001 - 10/2001:

Issue Dates (Start - End)
5/2001 - 10/2001

Earnings (Start - End):
11/1/2001 - 5/1/2002
5.44%

But the language at the bottom of the table you cite implies that the six-month rate is the rate in effect from the most recent announced composite rate. That would mean a bond purchased in October would get 5.92% until next April, when it's rate would decline to the composite rate based on the most recent inflation adjustment just announced at the beginning of Nov. Confusing, isn't it? Shouldn't be a big deal for those who bought in October. Half a percent, either way. Probably more meaningful to have locked in the 3% fixed portion for the life of the bond, as opposed to the new 2% rate.

-- posted by Rande

Permalink Print Discussion Join the latest discussions

» Rande - Re: Re: Re: Re: I think I got the answer

In response to message posted by Kirk:

Kirk,

I think the formula is fine, just a question over what period the rates apply. It does seem that the bond will receive whatever rate is in force at issuance for the next six months. At the end of the bond's particular six-month period, the rate will be changed to reflect the most recent inflation adjustment (so an Oct. bond would get the 5.92% for six months and then change next April to reflect the recent 1.19% inflation adjustment). Probably not as big a deal as getting the 3% fixed portion for the life of the bond, which those who purchased in Oct. should enjoy.

Amazing these things have garnered so much "interest," isn't it? The contrarian-minded might be thinking that the mad rush by small investors to lock into these things might be a dumb money signal of an inflection point. Still, for the time being, the Oct. rate looks good by way of comparison to other rates out there.

-- posted by Rande

Permalink Print Discussion Join the latest discussions

» Rande - Re: Re: Re: I think I got the answer

In response to message posted by dewam:

dewam,

Found the following, which confirms your read. Thanks for the heads up:

ftp://208.131.225.4/sbibond.doc

Excerpt:

Semiannual Rate Periods. A bond’s semiannual rate periods are consecutive six-month periods, the first of which begins with the bond’s issue date.

Why are semiannual rate periods important? It’s not until a bond enters a new semiannual rate period that the most recently announced composite rate begins to apply. This means that there can be a delay of several months from the time of a composite rate announcement to the time that rate determines interest earnings for a bond.

Examples: If you purchased a bond in April, its semiannual rate periods begin every April and October. At the beginning of the semiannual rate period in April, the most recently announced composite rate would have been that which we announced the previous November. This rate will determine interest earnings for your bond for the next six months, through the end of September. At the beginning of the semiannual rate period in October, the most recently announced composite rate would have been that announced the previous May. This rate will determine interest earnings for your bond through the end of the following March.

By contrast, if you purchased a bond in May, its semiannual rate periods begin in May and November. Accordingly, the composite rates announced in May and November will apply immediately to this bond.

(table)

If your bond has an issue date of:

October

Then its semiannual rate periods begin every

October 1
April 1

And we announce the rate that applies during a rate period in:

May
November (of previous year)

-- posted by Rande

Permalink Print Discussion Join the latest discussions

» Centigrade233 - Re: The Rational Bear Case

In response to message posted by Centigrade233:

Rande, having offered no counter srguments, I assume you agree with everything I said.

-- posted by Centigrade233

Permalink Print Discussion Join the latest discussions

» Rande - Re: Re: The Rational Bear Case

In response to message posted by Centigrade233:

Centi,

Didn't realize you were looking for a response. I do think we have a natural tendency to extrapolate recent experience on into the future, ad infinitum, as though there were no end in sight. This seems to be the case whether things are currently good or bad. But, more often than not, things are never as good as they seem when they seem really good just they aren't as bad as they seem when they seem really bad. And if there is any constant, it's that everything is subject to change. Some things never change, however, and my own list of those immutable laws of investing are:

1. Human greed and fear.
2. The economic law of supply and demand.
3. The profit motivation of business in a capitalistic society.

Beyond that, the optimist in me (as well as the realist, relying on history) believes that progress and growth over the long term are inexorable, inevitable. For most Americans, in particular, it is our nature to believe that our best days lie ahead. I don't doubt it for a second. But it does seem reasonable, given where we've come from in the last decade and where we are now, to expect sub-average equity returns over the next decade or so, particularly when it comes to large-cap U.S. growth stocks. The key, as always, is diversification within an appropriate asset allocation. The portfolio decision is always a personal one and should be based on specific circumstances -- individual goals and objectives, current and future purpose for the portfolio, cash flow needs, time horizon, risk preferences, etc. I do believe there is a suitable asset allocation for any individual that, given a long enough time horizon, patience and discipline, will provide the best chance of meeting invidivdual needs, goals and objectives. That's going to vary from person to person, of course, since there is no one-size-fits-all. The goal in any situation, however, should be a personal investment policy that is not reliant on current short-term market gyrations, the latest pronouncement of some third-party guru's crystal ball, or the whim of human emotion.

-- posted by Rande

Permalink Print Discussion Join the latest discussions

» SPYDR22000 - closed-end municipal bond funds

Just read the following recommendation from bond
guru Bill Gross,

TSC: Is there anything you like in the equities market?

Gross: Now that's an interesting question to ask someone who's been dubbed "the bond guy." But let me refer back to my comment on municipal closed-end bond funds, which are traded on the NYSE. Munis these days yield almost as much or more than Treasuries. You can buy these municipal bonds via closed-end funds, and for the most part they're AA quality instruments that can yield on average 6% -- and they're tax-free and very liquid. Now, am I "the bond guy" or what?

Any of these closed-end funds you particularly
like?

-- posted by SPYDR22000

Permalink Print Discussion Join the latest discussions