Czech Koruna

The chart depicts that the US dollar has more than cut in half against the Czech koruna over the course of this decade. The Czech koruna? Really?

Apparently so.

The Czech Republic is one I keep tabs on because Jyske Bank covers it closely and writes about it a couple of times a week and I read Jyske's commentary every day.

The Czech Republic certainly has its issues. It is a deficit country, with the deficit getting larger, inflation has recently broken to the up side, they don't corner the global market in something the rest of the world needs, the stock market has participated in the global sell off dropping 18.5% from its high last fall so there doesn't seem to be much in the way of standout information.

Yet the koruna has more than doubled. It has a trade surplus with the US that has been growing maybe that is part of the equation? In 2007 GDP grew by over 6% so that might be it too.

I certainly do not have all the answers but I think this more about strength in the Czech Republic than weakness in the US. One reason to draw this conclusion is the koruna has gone up a lot against the euro during the same period it is up against the greenback.

This might be consistent with something I have theorized about before which is that there will be many countries that one way or another become more important in the world economic order. This could mean a country goes from completely irrelevant up to merely unimportant but still becoming more important.

The point is not that anyone should go out and buy korunas but in thinking of cash as an asset class and trying to look ahead to where returns might need to come from we need to understand this sort of thing.

On this second chart we see the koruna going up more than SPY. Sometimes the two correlate kind of closely but the koruna has been immune to declines when stocks sell off.

Before the decline that started in October the equity returns charted were just fine and the currency was right there with SPY.

That is obviously looking back. Looking forward I wouldn't think foreign currencies could go up that much from here versus the dollar (insert nervous smile). But what if some currencies average 6-8% over the next couple of years and domestic equities do the same?

Currency is usually less volatile than equities. If the two return the same wouldn't choosing the product with less volatility make more sense? Unfortunately there is no way to know if equities will return less than normal but there is some visibility for it. In that context allocating some small portion to currency makes sense. Maybe that should be via some sort of managed vehicle like a fund or a manager or on your own but as an asset class it has been and I believe will be compelling. It will also become easier to access currencies.

These types of posts always draw comments about currencies not being appropriate for most people. Well maybe except there are fewer moving parts to most currencies than most stocks. Also just because something may not be ideal does not mean that it should not be studied and possibly utilized in moderation. Do you think anyone out there ever started out with mutual funds and then as the learned more began to integrate individual stocks?

Don't misread this as currencies are easy, they are not, not by a long shot but that still does not mean they should be avoided either.
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A Social Thumping?

I had a moment of clarity on the stairmaster yesterday that while I am far from early on this thought, it is grim for society nonetheless.

Based on various things I read and anecdotal observations I am convinced that baby boomers (I am using this term for economy of space, not for rigid age parameters) is going to spend beyond their means, looting their nest eggs and one way or another to end up living for years way below the lifestyle they tried to save for.

This will cause various strains on the system that I cannot quantify.

I have read about this before obviously but for whatever reason it just now struck a chord with me. Plenty of folks have offered explanations as to why this might happen but I am not sure it is something that needs to be explained.

Most people know they need to watch what they spend, they know the market can go down every now and then, can grasp how the numbers work but just as that is true many people end up living $100,000, or more, lifestyles when they can only live $80,000. The $20,000 doesn't sound like much of a difference but two or three years like that combined with a 10% drop in the market and the odds for failure now go way up.

How many boomers do you think have retired since 2003 (rhetorical question, I have no idea)? Anyone who has spent too much in the last couple of years is now probably relying on the market to bail them out over the rest of the year. Maybe it will or maybe it won't but clearly they have no hand in the outcome--unless they go back to work right now and don't take anything out of their account for the next 24 months.

I have written about this sort of thing before but it has been a while. I agree that the way in which people retire will by necessity (for most folks) have to evolve, it probably has been evolving actually. To me the easiest idea is to seek out multiple streams of income (there is a book out there by that title). That can include your portfolio, social security (even if the benefits get discounted) and some sort of job (part time or otherwise).

The ideas here are limitless. I have a neighbor who is 76 (I mentioned he was 77 in an earlier post, sorry Phil) and can have all the work he wants with his backhoe at $60 per hour. Another neighbor owns a small snowcat and plows everyone out (we pay him $20 for about 3 minutes work). Both of these are tonka toys to these guys; they have figured out how to monetize playing on their toys.

There are ways to monetize certain hobbies. Chances are if you have a hobby you love that you've been doing for 20 years it wouldn't be that difficult for you to assess whether it can be monetized and then proceed.

I realize not everyone can work until they are 70 and there are potential obstacles that go with getting older but the bigger picture to what I am describing is the need to be resourceful within your circumstances, to live within your means and figure out how you can take some stress off your nest egg (I just had an image of Albert Brooks from the nest egg scene in Lost In America).

I think the impact on society could be very serious, the action you take will determine whether this involves you or occurs around you.
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More Draw Down Dilemma

Develop A Contingency Plan For Retirement - Features

Here is a quick read about the draw down dilemma retirees face. it cites the 4% number as a good starting point but points out how the number could go up to 6% in a very bad case scenario for equities.

My answer to this has always been; whatever you got, 4%.

My answer probably means you don't run out of money but does mean that a meaningful pay cut is in the offing after a bad year or three. That scenario would also have to be mitigated of course but part of that solution is behavioral--depending on your specific situation it could all be behavioral or none of it but mostly likely somewhere in between.
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Viewer Mail

A reader asks the following;

with most usa interest rates now below the current rate of inflation, ie. negative real yields, i know you often speak of what the text book says, does it say anything about what is the usual best of action in this situation of negative real yields? In particular as it relates to income. Do you go with shorter maturities? Longer? Shun utilities? Overweight gold/commodities etc.

There is a lot there to try to work through. I may have been interviewed on Monday about this topic (not sure if the brevity of the email exchange constitutes an interview) and so I'll expand on those answers.

The current state of yields is problematic if you have cash earmarked for fixed income, as I do as a couple client holdings have matured or been called away. Locking in less than 4% for five or ten years seems like a very bad idea (I am not really looking to buy fixed income for a trade). The short version of this post would simply be that I think the best thing for most folks is to just be patient.

I think it is unlikely that yields stay unacceptably low for a long time but I have to say that Nicole Elliott's warning notwithstanding I did not expect the ten year to go so low in yield. A few years ago yields were too low, I waited, and eventually there was a window for a few months where two year treasuries yielded 5-5.25% and so I was lucky to pick up some yield then. Yields will go up at some point.

To the reader's question of shorter maturities, the two year is yielding about 2% and the five year is a little under 3%. Assuming you are not looking for a trade do you feel compelled to lock in those kinds of yields? You are probably getting better in your money market. So, again, just wait.

You are probably aware that parts of the muni market have been yielding more than the treasury market, not doing the calculation for your tax rate but straight up yielding more (some of them). That is compelling in a way for taxable accounts but there is some sort of message there. If some issues have problems keeping their AAA rating as a function of what happens with the insurers (I am aware of the recent news but nothing would shock me) they could be a tough hold.

Obviously a rating downgrade due to losing insurance won't make the issue any more likely to default but could do some nasty things to the price between now and maturity.

The reader asks about shunning utilities. I would not shun them, no. Generally they held up much better than the market during the first couple of weeks in January and generally been market performers for the last three months but the yield has obviously been better. Bespoke had a table of average returns sector by sector during bear markets and utilities dropped what I believe was about 21-22% versus about 30% for the SPX. However when yields start to go back it makes sense to expect utilities to lag and there is some history to support this.

I would avoid heavy closed end fund exposure here. I'm not a fan of heavy exposure to CEFs in general but when rates do go up some CEFs will get pasted. Owning a couple of CEFs is ok if that happens but if you go heavy you will very likely have some ugly results where you were expecting stability.

What about floating rate funds you may ask? Sometimes they work as advertised and sometimes they don't. You are relying on the market to not create a wider discount and the market does not always oblige.

One area where I have had some luck is with foreign bonds which I have written about before. These are tough to access due to order size restrictions but the liquidity for foreign sovereign debt seems to be pretty good. Within my ownership universe is two year paper (a little shorter than that now) from Norway, Australia and Great Britain.

Each of the countries are different and so the blend makes for good diversification, IMO. GB is struggling but the yield is pretty good, Oz is a high yielding commodity currency with deficits and Norway is a commodity currency with surpluses (my YTM here is in the mid fours and the currency gain has been huge since I bought).

I'm not hoping for a lot from the currency exposure but the yield is better. If you can find exposure it might be a good thing for a small portion but again going heavy in CEFs in this space has the same problems.

The WisdomTree currency ETFs could solve the problem as I believe they will hold short term debt from the underlying countries so hopefully they go ahead and list them all, the funds are successful and then they expand the product line.

Lastly a link. Mike Shedlock had a great post a couple of months ago that will be very helpful.

Last night as I watched some of the Hokies smoking of BC on the U I noticed that Adrian Branch was doing the color commentary. Wow that is a name from the wayback machine. He was something at Maryland in the mid 1980s. I tried to find a picture of him from his time with the Geelong Supercats in Australia but no such luck.
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Tuesday Tidbits

One newsletter I read daily, or whenever it gets published, is from Jack Crooks. Yesterday's letter talked about something I have touched on quite a few times in the past. He talked about someone who said to him that he (Crooks) seemed unsure on his thesis that the dollar will go up in 2008.

Crooks proceeded to delve into how he spends a lot of time exploring any thesis for why he might be wrong. This is very important to understand for anyone who goes narrower than a three ETF lazy portfolio.

The way I think of it is that every portfolio is vulnerable to something (actually more than one thing) and it is important to know what you are vulnerable to and if or when your weak spot might hurt you and then what to do about it, if anything.

This is why I think people like Kudlow offer so little. As I have said before, there is no need to protect against the rosy scenario he kept espousing. But since the market does not go in one direction anyone interested protecting against down a lot must stay in touch with what threatens his portfolio or the overall market.

From the alternative assets file I found this article about freight futures on Alphaville. In the last couple of years, and I am sure over the next couple of years too, there have been products created to invest (or speculate) in all sorts of things that don't correlate directly with stocks.

Anyone buying into the idea that we will have to endure below normal returns in the equity markets might be curious to learn more about these products or maybe someone will list a kitchen sink fund that will own a whole bunch of these things like some Baltic Shipping Futures, Carbon Credit Futures, the Australian Meat fund (this is a real thing but not traded on the secondary market) and the Kazakhstan tengi. Couldn't that mix deliver an absolute return we could all live with? Obviously I no idea.

Yesterday's post was syndicated on Seeking Alpha and a reader there left a link to a PDF by Zvi Bodie that explores a 90/10 allocation as discussed yesterday. It was worthwhile to read a different, and very qualified, spin on the concept.

The first flaw that came to mind in Bodie's piece (I'm not casting stones, every exercise like this has flaws, anything I could possibly come up with would have flaws too) was the potential for incredibly low interest payments.

The paper was written in 2001. Since then we had short rates with a one handle for a long time and we might be on the way there again for a long time. Having 90% in t-bills yielding 1.5%, or even 2.5%, for any length of time seems problematic and chances are rates that low would have been considered an outlier of a possibility in 2001.

Early on the piece he talks about TIPS for some or all of the treasury portion so obviously the interest is even less which might not be so bad unless the deflation crowd turns out to be correct.
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HardAssetsInvestor.com

Uncovering Hidden Commodities Exposure

I had an article publish today at HAI.
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Intriguing Nonetheless

Even though I don't think it is the ideal strategy for the vast majority of investors I still find Nassim Taleb's idea of 90% t-bills and 10% going berserk (again that is my word not his) to be intriguing on what I guess is an academic level.

If you knew what this year's Dry Ships (DRYS), which went from $17 to $79 last year, and Suntech Power (STP), which went from $34 to $80 last year, were going to be and you put 5% into each and put the rest into some combo of t-bills and euros and could repeat you'd be in pretty good shape.

There are various new fixed income and more recently currency products listing that make the 90% part easier with regard to foreign diversification (the WisdomTree products that were filed a while would go a long way to filling some gaps if they actually list).

If we move away from the specific 90/10 and think more about getting alpha from a smaller portion of the portfolio while the rest is more conservatively allocated here is one thing that a few people have asked about that very likely will not work... putting 50% into a double long ETF and the rest into treasuries.

The idea is that the double long ETF would replicate the market plus the treasury interest so the two added together would beat the market. There are a couple of OEFs that do this with SPX futures and treasuries and I believe these funds don't succeed regularly but someone please correct me if I have that wrong.

The problem with the double long plus treasuries concept is that the double long fund attempts to capture twice the move of the S&P 500 on a daily basis (and even then it is not perfect) not over longer periods of time. Over the next three months (just a random time period, you could pick any other) the double long fund could lag twice the SPX, do better than twice the SPX or come in right on the nose, there is no way to predict because it depends on the sequence of daily moves in the SPX which can't be predicted.

Another issue is that it will never be 50/50 after the first day the idea would be implemented. From day to day it would vary slightly and depending on the market does it could vary a lot over time. To maintain something close to the intended 50/50 there would need to be a fair bit or rebalancing which would probably be expensive and maybe would wear out the calculator. Even then it seems like you'd always be a day or two behind.

I am curious enough about the concept to keep exploring but I would rule this specific idea out.

One key to a happy marriage (we're at 15 years and still happy) is choosing your battles. Just as my wife does not fight me on college basketball in March I do not fight her on the Academy Awards or the red carpet show right before. That being said, is it me or did John Travolta look like Eddie Munster?
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Sunday Morning Coffee

Hopefully you can benefit from the following anecdote and apply it as useful should a similar situation ever arise in your life.

Someone we know, whom I will call Neighbor K (there is no K in this person's name), had a serious life changing event--one of the biggies in every financial plan--last month.

Neighbor K is going to sell the house in Walker and move a couple of hours away to be closer to adult children and grandchildren and will be buying a house in the new location.

Neighbor K plans to try to sell the Walker (the name of the area where we live) house at what sounds like a very high price and the new house will cost the same as the expected proceeds. Neighbor K loves the house and naturally thinks it is worth a lot of money but unfortunately the comps are not in Neighbor K's favor. Only three houses have ever sold in Walker for the figure sought by Neighbor K, last summer more and newer house was sold for 20% less than what Neighbor K is looking for and there is currently a much nicer house not selling for about the same figure.

Neighbor K is on the hook for the new house which will be completed in nine months (as on the hook as anyone can be as I don't know the particulars on how someone gets out of one of these deals).

I am not learned enough in behavioral finance issues to be able to label all of the behaviors exhibited in the story but there are quite a few.

Neighbor K is making a lot of assumptions and things seem like they will have to align perfectly for this plan to work out. Making assumptions along these lines is a very human thing to do. Things like I will outperform the market, I can afford this Harley, my house is worth X, I will enjoy working it until I'm 80 (this is one I make), next year I'll spend less and so on.

This really is a human thing and so it's ok to initially think I will enjoy working until 80 but recognize that type of thought for what it is, an assumption relying on certain positive things working out, and mitigate the reliance on things having to go perfectly (what if I have to stop working at 60?), and maybe have a contingency plan. For Neighbor K, what happens if the Walker house does not sell or if it only brings in half of the amount hoped for?

This not to say you should expect the worst. I'm not sure how it comes across but personally I am very optimistic but do believe in planning in case things don't go as hoped for. If that seems contradictory, fair enough but people get done in by poor decisions or ill-conceived financial plans all the time and because Neighbor K's plan relies on selling one house for a certain amount of money it only makes sense to ask, what if it doesn't sell?

The picture is from a few winters ago. A sinkhole just opened up as the propane truck went by. Our property is sort of triangle shaped and this happened on the point of the triangle that is near the road. That could have been a big uh-oh.
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The Big Picture For The Week Of February 24, 2008

Unrelated to the video but relevant to a question from late last night about the Friday rally; I have yet to read or hear the extent to which short covering may have been involved in what must have been quite a few buy programs triggering. Isn't the short interest in all the financials quite high? Isn't that where the rally started? Maybe not.
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Scheduled To Appear

I am speaking at the Financial Advisor Symposium in Las Vegas on April 18 at the Mandalay Bay Resort. I believe the other people I am paneling with are Tom Lydon, Richard Kang and Carl Delfield. You can click here for information.

Over the last few days I had two articles up at theStreet about investing fads and my belief that the solar stocks have evolved into a fad (the fad, or if you prefer mania obviously started last year). I got torched in my email account many times over in a very humorous manner.

Despite my saying so repeatedly many folks thought I meant solar technology was the fad when I was referring to the stocks. I for one hope solar catches on in a big way. I made a comment on the blog a long time ago about why they don't turn the entire state of Nevada into a solar panel (someone then said that idea was stupid but anywhoo). I would love to cover my roof with solar film (or whatever its called) and have no electric bill but it doesn't make economic sense yet (does it?).

The action in the solar stocks, again I am saying the stocks, has been very typical of other fads; a lot of euphoria, huge gains and now some big drops. Like many past manias people feel the solar stocks are different, I got a lot of emails telling me how much some of the publicly traded companies earn and what their future contracts look like and so on.

There is nothing new. Past industries have started up, offered great promise AND delivered on that promise but this all occurs with many successes and failures in the formation of the new industry.

Compaq Computer comes to mind as an example of a company that was a game changer, made a ton of money and for a while (mostly in the 1980s) was a rocket of a stock. I think the nature of capitalism is such that new things come, there is heavy competition in these spaces and the landscape of players looks much different a few years or so after the start.

History is littered with great companies that for one reason or another fell very from their peak. As one reader reminded me Cisco was at $80 once. While we're at it Yahoo was at $105 once, Dell was $59, Microsoft was also at $59 and Juniper was $244. This has happened in other industries too and that the current crop of solar stocks will be different seems like a repeat of the same mistakes made in every other mania or fad from the past.

I'm not sure why this fired people up so much but so be it. The context probably makes more sense for anyone who has read the blog for any length of time that emotion is playing some role in the solar stocks and the combination of a monster 2007 combined with being late in the stock market cycle probably means moderation is very warranted for people who want exposure to the solar stocks.
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Getting On A Plane

One last look at Waipi'o Valley.
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India

It looks like WisdomTree is going to list its India ETF this Friday with ticker EPI. It is weighted by earnings not dividends.

Information on the index is posted here (the link may not work). The funds is weighted 25% to energy and 15% to materials with Reliance Industries have the largest, by far, weighting of 13.56%.

The more widely known names from India are Satyam, Wipro and Infosys yet "Software and Services" are only 11.51% of the index.

I'm not sure I would intuitively think India would be 40% resources but I guess that's where the earnings chips fall.

India is a relatively complicated investment destination. A few clients own one of the closed end funds and have owned it for a while (but I did shave some off along the way). I have no real complaints with the fund but have never loved it either.

When we were earlier in the stock market cycle I was comfortable holding both China and India across the board but not so later cycle. I sold my Chinese stock last (I believe) June and as I said only some clients have India. If I had to choose between China and India for the long term (and to be clear my zero China is more of a short term tactical position than anything else) I would probably prefer China but I do concede the bullish case for India is compelling.

Back to the ETF if you are inclined to own it I think you need to factor in the energy, and materials weighting of the fund into the rest of what you own. Most country funds are heavy in something. A 5% weight in EPI adds 125 basis points to whatever else you have going on in energy.

This is a big thing with country funds. That a country fund is overweight something is neither a positive or a negative it just is so it is crucial to be cognizant of this issue and take steps to make sure you end up with the sector weightings you want.

The problem seems generally more prevalent with the financial sector. Many different types of funds have more than 25% in financials. I've written about a lot of WisdomTree funds for TSCM and always include the same caveat about bad news for the financial sector being bad news for the fund.

So with EPI, among other things, weakness in energy stocks will probably hurt the fund and I doubt a rebalance would bail the fund out because energy prices could probably come down a fair bit and still keep the sector on top of the Indian earnings heap.

We are headed back to Arizona on Wednesday after the close.
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Tajikistan

Perhaps I am the last to know but the weather in Tajikistan is so cold right now that basic infrastructure is failing to operate.

There are food and energy shortages and as this link tells it many people are in danger.

This speaks to the underlying importance to infrastructure modernization and spending that will occur over the next few years (or longer).

The stocks involved will not be immune from ups and downs but the building block for the theme is that the world needs this desperately.

This story should also remind us to be thankful for what we have and what we don't have to deal with.
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How Much REITs?

A reader left a question asking how much to allocate to REITs in a portfolio. He noted David Swensen's 20% suggestion and wondered if that number is too high. The reader also asked about foreign REIT exposure.

To me this is kind like asking how much to put in commodities. For either there is no shortage of smart people and well written white papers suggesting big numbers to these asset classes.

To be clear I am not going to out-debate anyone on this point and anytime I write this sort of post someone will leave an articulate comment saying why a diversified portfolio should have more exposure than the sorts of numbers I kick around.

If you think about the various asset classes available that help bring a portfolio away from looking like an index fund you could quickly get to owning nothing but the diversifiers (small hyperbole). There's REITs, commodities, infrastructure, a call writing something or other, absolute return and you might have a couple to add to the list that I'm missing.

Swensen says 20% to REITs, there are some that would say 20% to commodities and I imagine the other segments I mentioned each have fans that would argue 10%. If you pull in all those disparate opinions you'd be 70% in diversifiers and 30% equities. I doubt too many people think that would be a good idea.

One thing that needs to be incorporated into the thought process is that stocks have been the best performing asset class over long periods of time (we've all seen that Ibbotson's chart). The various diversifiers, from where I sit, are for smoothing out some of the volatility that goes with owning equities, they are not intended to be substitutes.

Additionally, every so often something goes wrong with these sorts of things. Over the last 12 months iShares REIT (IYR) is down more than the Financial Sector SPDR (XLF). Long time readers will know I only had one across the board REIT name at a 2-3% weight, that it did poorly and that I sold it in December and have not replaced it. That one stock, at 2-3%, was it for several years. I generally believe REITs offer diversification benefits but of all of the niche things in my ownership universe my comfort level with REITs has never been that high.

For some of themes I would consider two holdings at 2-3% each but can't see it for REITs. As far as foreign goes, the Hong Kong markets gets written about like it is the healthiest market out there but I just read something somewhere that said because of HKD's peg to the greenback, rates in HK were lowered but their inflation rates makes the cuts a bad idea and mortgages their are much cheaper than they should be so this creates visibility for a problem. I have no idea if there will be a problem but the path to one is easy to see.

While I am acutely aware that I am no David Swensen, 20% in REITs is way too much for me. The number I had been using might be too low most of the time but was lucky during the selloff of the last few months.

The picture is from New Zealand.
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What If You Learn you Can't Handle The Stock Market?

I have had a couple of posts up lately saying the low octane is great and all but going all low octane is probably a bad idea for most folks.

That being said there are some people who learn along the way that they simply cannot stomach normal stock market volatility--all of the numbers about how markets work notwithstanding. I imagine that with each correction and bear market quite a few people have this sort of revelation about what they can cope with or not as the case may be.

The simplest response to this is save more money. Your plan calls for a certain number (or range) on a certain date and then that number needs to do something for you after retirement so that it grows enough to offset inflation and allow you to deal with the unexpected things that are often discounted in financial plans.

If you need $1.5 million 17 years from now and have $400,000 now you know that the $400k will about double in 15 years if it can average 5% interest over that time (maybe this is a bad assumption?). So that means you need to come up with $700,000 in 17 years which works out to $41,000 per year (it will come out to be less than that as the amount saved now will earn interest but lets keep it simple). So in applying your numbers this either makes sense or is like the TD Ameritrade commercial where DA McCoy makes the joke about needing to save more than you earn.

My little scenario above probably ignores growing enough during retirement to have enough money.

Sort of tying in with this is the Nassim Taleb idea of putting 90% of the kitty in t-bills from many different countries and then going berserk with the other 10% (he doesn't say berserk, I just think it is a funny way to think of it).

If 10% is your crazy-go-for-it money, maybe allocating that 10% between four or five themes out of maybe eight or so that you study could be a viable plan? If you can find any ETF for these themes then the chance of buying something that goes to zero pretty much (no guarantee) goes away.

If you can find two themes that go up 50% each in a year (not insane in this context, but not easy either) you might add 200 or 250 basis points of return for the entire portfolio which combined with the interest on the 90% and assuming the other themes picked to completely flop you might get close to a normal return.

Candidly I don't think this is a great substitute for just building a diversified portfolio and I question whether the person who decides they do not want to ride the normal ups and downs of the market will have the confidence and the time to study and then pick four aggressive themes to buy as I do no think the totality of this idea would mean less work.

In addition to the themes there needs to be some study devoted to the countries selected for t-bill investing. I do think it is interesting from a theoretical standpoint but will reserve final judgment for another time.
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Sunday Morning Coffee

There is a David Swensen article in the NY Times this weekend.

He is always a good read even though more so than other articles like this that I have read I really came away from this one believing he would not think much of the way I navigate the market. Oh well.

The article focuses on advice to individual investors that they should keep it simple, keep it diversified and not try to time the market or other big macro issues.

Hopefully his main points resonate with you because I agree with in large part with what he says. As far as not timing the market, obviously long time readers will know there is an element of timing in whether to take defensive action or not but that I write about small tweaks and adjustments and not huge bets is an acknowledgment of what Swensen says; acute awareness that defensive action could be taken at the wrong time and so the size of the defensive action would determine the consequence of being wrong.

Hence the small adjustments.

A lot of what I read on other sites or glean from some reader comments is that simple may not be the top priority for too many people but perhaps simplicity is in the eye of the investor?

Occasionally I use the term building block to refer to the most elemental aspects of portfolio management or the nature of market cycles.

Whether keeping it simple appeals to you or not I think it is crucial for all investors learn, understand and revisit the building blocks. In addition to thinking too many people stray away from simple building blocks based on some other sites and some reader comments on this blog some of the emails I get in my Street.com email account that often continue some extremely risk-ignorant ideas about how to invest.

Honestly I do not know why people would rather not keep it simple but maybe advocating that people at least learn, understand and revisit is more practical solution.

The picture is from the green sand beach down at the southern most point of the island. The sand is actually green.
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The Big Picture For The Week Of February 17, 2008

On Friday we went to the Waipi'o Valley. It is up in the northeast corner of the island, you turn off the main road at Honoka'a (a very neat little town in its own right) and go another nine miles.

You have to hike in and out. The hill is short, about 3/4 of a mile, but it is the steepest thing I have ever hiked, far steeper than anything in the grand canyon. Our pictures might give an inkling but not really.

I put up a link to a paper about buy writes, specifically it contained some of risk adjusted numbers that go with buy write.

For some reason the paper focuses on BXD which is the Dow 30 as opposed to BXM which is the S&P 500 but be that as it may; BXD had an average annual return in the roughly ten year period studied of 7.40% versus 7.72% for the Dow and 8.49% for EFA. BXD's standard deviation over that time was 11.44 versus 15.35 for the Dow and 14.95 for EFA.

Anyone who cares about risk adjusted returns will likely be intrigued by those numbers.

I've mentioned this sort of thing quite a few times before and I realized there is on aspect to this concept that I may not have touched on before which is that these sorts of things sometimes do nothing which can create an restlessness which can lead to more trading than is ideal.

We know the market averages 10% or whatever the number is per year. Often most of that positive return comes from one or two big years. I don't have my Trader's Almanac with me but I would venture to say that up a little is probably the most common market condition in a given year. If that is right then a lower octane thing is probably not going to do much. If the market is up 6% one year a low octane device might only be up 4%.

For some stocks 4% isn't even an unusual day. But think about a slow year. A low octane product on its way to a 4% gain probably won't show a lot of movement which is of course exactly what drew you to it in the first place. If something isn't supposed to do much, hopefully you don't get impatient while it, you know, isn't doing much.

I have always been a big fan of low octane but I believe strongly, and have written so, in moderation with these things. I have maintained one call writing CEF across the board for clients and some folks have other, unrelated low octane too but not a lot.

Low octane, like buy write, is great in the context of managing the volatility and other characteristics of the entire portfolio but I have to say that going all low octane or even very heavy is not a compelling proposition for most folks.

A properly diversified portfolio means having exposure to the stock market to capture growth over the long term. This is an important building block before figuring out how much, if any, low octane to own. Just like anything else too much of a good thing is a negative in terms of risk taken, the failed auctions last week as a case in point. Those things were safe and golden and then the concept broke down (I'm sure just temporarily).

It may be tough to believe but too much low risk ends up taking on risk.
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WKRP

"We want more rock and Les Nessman." Or was that less Nessman. That line from WKRP might be better than Herb's muy dinero line and this is where the investing world may be with Dennis Kneale's constant appearances on The Network.

I met Dennis in late 2004, we did a segment on the Forbes on Fox show together. He is a very nice guy and although some of you will doubt me on this he does know more than a thing or two about how to look at a stock.

Unfortunately for anyone who watches the network they have him commenting regularly, almost exclusively on things that are outside his wheelhouse and his image and credibility are each taking a beating. To use a shaky analogy; a tow truck brings nothing to the table for fighting a wildfire.

On to the questions...

A reader asked about the Accessor Strategic Alternatives Fund (ASAFX) and left a link to the prospectus. It looks like 80% of the fund will go into assets that usually have a low correlation to global stock and bond markets. Sounds good to me but I do not know if the fund is trading, or what they own or much else. Not to be flip but it will either be a viable absolute-ish type fund or not. I will add it to my watch list. I am all for learning about anything but there is never a rush to buy.

There were a couple of comments favorably disposed to the the Claymore fund from yesterday's post that owns it all; UEM. One reader made a point that I can certainly buy into (even if not ideal for what I try to do) which is that used as a starting point an investor could fill in the gaps around UEM and have more time to learn how better to fill in those gaps.

One point I did not quite agree with was that using UEM is a good low cost alternative "for people with small resources to buy a broad, indexed portfolio" and that "it would take at least three or four purchase, each with minimums of several thousand dollars, to get the same effect through Vanguard funds" and finally that it means buying fewer ETFs.

Depending on how limited the resources, Sharebuilder only charges $4 per trade the last time I looked. Starting small does not have to be the barrier to entry it once was and further the implication is younger investors for whom 51% in equities is probably not enough.

Jasper would like to see a global ETF that took in all the stock segments into one fund. He had specific criteria that might be tough to ever find but NortherTrust has filed for the NETS DJ Global Total Market Index Fund. If it ever comes it will have it all but maybe not in the proportion you would like.

One thing though is that no matter what it looks like it will have skews and biases that will at times make a bad hold. My own take is that going so broad (applies to EFA) ends up blending away all the attributes sought.

A couple of different questions came in about the failed auctions and what they mean for different parts of the closed end fund market. I try to minimize the use to sophisticated industry jargon but I don't know how to articulate this without the jargon; the bond market is all messed up.

I do not have all the answers, not even close. The part of this that I know is what I have been writing about for a couple of years. When the yield curve takes on an abnormal slope there will be fallout--that I know. What I don't know is how to assess where and when various fixed income segments will be impacted.

The current abnormalization (how about that one?) seems longer than usual and this failed auction business is a new shoe to drop, it makes sense to expect more shoes. I have never been a fan of widespread CEF use. There are some segments where CEFs are, for now, the best tool but the muni funds and the preferred stock funds have a habit of not hanging in there when you need them most. Some CEFs use auctions to access liquidity (this is how they leverage) so if some auctions, related or not, fail then CEFs could be guilty by association or because they really are directly impacted.
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Read This

BuyWrite Strategies - Research

If you want to learn more about the subject.

I'll try to post a follow up to it, maybe over the weekend.
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Baseball and ETFs

I watched all of the Clemens hearing that CNBC showed and it was brutal. Perhaps naively, I hope Clemens did not use HGH or steroids.

Now I know why congress says they hold hearings about baseball but as I watched I still found myself wondering what the point of their involvement is. It makes no sense to me. Others may feel they are right to be involved, which is ok, but it seems like a colossal misuse of resources.

I am not talking about the issue just who is apparently presiding over it. And the one guy from Indiana who tore McNamee a new one, tell me that guy didn't remind you of Senator Geary from Nevada (this is a pop culture reference that hopefully everyone knows).

By now you know that Claymore just listed three ETFs that have the (kind of) brand name of Capital Markets. The broadest fund is the Capital Markets Index Fund (UEM) which takes in equities, fixed income and money market instruments. There are 9903 holdings in all (according to the Claymore website).

Slightly narrower are the Capital Markets Bond Index Fund (UBD) and the Capital Markets Micro Term Fixed Income Fund (ULQ).

I first heard about these ages ago and I have to say I was confused about what has ultimately become UEM when I first heard about it and I am still confused about it now. I asked one person from Claymore what the point was and he said that you can own the entire capital market in one fund. It might be me (seriously) but I don't know why that is useful.

As of year end 2007 UEM was 51.24% in equities, 35.55% in long term fixed income and 13.21% in cash and equivalents.

What I do know from having talked to Claymore is that there is a ton of science and research behind the concept, the people who have created (Dorchester is the name of the company) are very smart and I do not doubt it will do what it is intended to do.

But I still do not know what the point is. You can read the literature and perhaps you can glean a better understanding than me.

Part of my lack of understanding is that I think even the laziest and most passive of investors make the stocks/bonds/cash decision but buying UEM takes even that away.

You don't have to have read this site very long to know I prefer blending together narrower things to allow for management of things like sector, style, asset class (think commodities, currencies, REITs and infrastructure), different countries, volatilities, yield, cap size and so on.

Even investors who would never pick an individual stock can make use of narrow products, in proper moderation, to add a lot of value versus a broad equity benchmark (as a note, adding value doesn't have to mean outperforming it can also mean smoothing out the ride).

After all that maybe UEM will turn out to be the most useful fund ever but I still probably won't get it.
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Interesting...

....how the charts work sometimes.

So the green line will either be a relevant stopping point or it won't.
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Is The Market Cheap? Does It Matter?

A reader left a comment that gave a reasonable "I hear ya but..." about the 200 DMA because three out of four timing indicators that Phil DeMuth and Ben Stein use say the S&P 500 is now undervalued.

Let me be clear I don't know anything about what Stein and DeMuth are saying, if anything, I am relaying the reader's comment and choose to believe the reader has his facts straight.

I have written about this sort of thing before, the Fed Model is an example of the type of market valuation process the reader is talking about.

All indicators of all types have flaws. If you are going to to rely on an indicator you have to know its flaws in order to make an intelligent decision about it.

First let's stipulate that Stein and DeMuth's indicators are correct and the market is cheap. OK, when will it go up? Will it get cheaper? What about being cheap will lead to a move in the market? Is cheap important right now? Do the risks that made it cheap in the first place outweigh the cheapness?

Every model along these lines I have ever seen can stay cheap or expensive for years as the market continues to move up while expensive or down when cheap.

My take on the 200 DMA is that the dynamics of the market are communicating the health of demand. Quite simply if demand is healthy the market stands a better chance of doing well regardless of how cheap it is. The drawback is that occasionally it will breach the 200 DMA in one direction for only a couple of days and then go right back--which is a reason why I don't make big bets all at once but just start with a tweak.

The way I look at it, valuation models/indicators rely on too many "shoulds." I don't find anything forward looking when armed with the knowledge that stocks are cheap. Additionally, demand healthy yes or no is a much simpler concept and where possible I think simpler is better.
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Where Will The Bottom Be?

The quest for where and when a bottom seems to be a big topic on The Network these days.

It seems like most of the guests are trying to figure out how to answer the question without telling the interviewer that it isn't such a great question four months from a top (but maybe I am just projecting my own beliefs on to these other people).

I mentioned a few times my belief that every aspect of this bear market has been very textbook so far so maybe the rest of it will be textbook too.

If so then we can expect quite a few more months and maybe another 10-15% down. Obviously if you think it will be worse than textbook my time horizon and percentages will not jibe with your thoughts.

I would say that if in June or July the SPX is 25% from its high (boy that really would be sticking to the book) I would be inclined to put on more equity exposure. The way I am positioned now that could mean selling some double short, buying some stock or both. I am not talking about going 100% invested on one day but taking one step in the direction of less defensive.

Another tool for me (and maybe you have something similar you rely on) is the 200 DMA. The market is way below its 200 DMA ( a sign of unhealthy demand) and the 200 DMA has started downward. At some point in the future the SPX will cross above which probably means healthier demand and probably another reason for less defense.

Note this requires no accurate predictions. If we are down by 25%-30% that would make it easier to justify wading back in, ditto when we the market goes above the 200 DMA. These things could happen next month and then the month after or some point far into the future. There is no need to be right about when.

If things do not play out so simply a plan B will need to be thought up. I have a couple of ideas which I'll write about in a future post.

The picture looks like it could be in New Zealand but it is the snow covered volcano on the big island. That is a lot of snow up there.
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Toughest Market Ever?

We have heard a few very smart people over the last couple of months say something like this has been the toughest market ever or words to that effect. Well I have heard that said a few times anyway.

In all likelihood it is not the toughest market for at least a couple of reasons.

The first is that the road to this downturn has been very textbook. If you have been reading this site for a while I pretty much spelled out the manner in which this would happen because.... this is what textbook looks like...the yield curve, the problems that stemmed from the yield curve, the signs of excess, the length of the bull market, the slow rolling over that started in October and the parade of very plausible theories about why this time would be different.

It appears as though I might have been right about this but if I do turn out to be right it is because I did not try to figure out why this time would be different. The very textbook nature of this makes it not that tough, IMO.

Another why I don't think this is the toughest market ever is everyone participating in the market knows more than whenever the "last" tough market was. Don't you know more than you did a year ago or seven years ago? I'd like to think I've learned some in that time and you probably would like to think the same.

The last reason why I think this is not the toughest market ever that we are only down 14.9% from the peak last October. All things considered I would rather that 15% went in the other direction and while 15% is more that down a little it may not really be as bad as down a lot, well not yet anyway.

Anyone making comments along the lines of being the toughest ever or worst ever or whatever is speaking hyperbolically and if anything is simply creating the potential for more emotion not less. A few months ago I interviewed the managers of the Nakoma Fund (NARFX) for a TSCM article and one of the guys said that a market like this is when a manager is more likely to add value as opposed to a raging bull market so in a way he is saying that raging bulls are tougher.

I don't know if that sentiment can ring true for a lot of people but I would expect my biggest lag to come the next time we are up 30% in a year. In 1999 the SPX was up 19.6% (plus dividends) with megacaps and tech leading the way. A repeat of 1999 has lag written all over it for anyone who wants to maintain a diversified portfolio. That's not a bad thing per se, just how it works.
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Sunday Morning Coffee

Last week my post about retirement issues garnered a lot of comments.

I had a follow up thought about the best time to retire, or more correctly start to tap your portfolio for income. The best time is right after the market goes up 25 or 30% in a year. If you just capture most of that effect you will have a lot more money than you did 12 months prior.

An $800,000 portfolio can generate about $32000, safely. If that is what you have right now and you are planning on retiring soon you might be reasonably expecting to take about $32000 out (or more precisely $35,200), you might be gearing up and planning for that amount. Then if you get only a 20% pop in the next 30% year you would have $960,000. Since you planned to take out $35000 but could safely take $42,240 you now have a cushion of safety, in a manner of speaking.

There is obviously an element of tongue and cheek in this idea but there is some truth too. Up 25% years do come along once or twice in a decade. Even if we enter a period of below average stock market growth (which I believe will be the case) there will be the occasional up-a-lot years.

The idea does not have to be wait-to-retire-until-the-next-one but figuring a way to take less from your portfolio until there is an up a lot year would take some ingenuity or thinking outside the lines and anyone pulling this off would clearly be much better off.

Retirement expertise is more of a financial planning thing than a portfolio management thing but figuring out how and when to retire (if ever) requires a lot of pre-planning. You stand to benefit from smart decisions and will have to live with the consequences of any bad decisions. It makes sense that in any one retirement plan there will be both good and bad decisions.

The best way to mitigate bad decisions or unintended consequences is probably to use conservative assumptions for everything (market returns, your returns and how much you can take out).

As a matter of philosophy being conservative will give you more options in the future; being under mortgaged (better yet no mortgage), only having one car payment instead of two, not having a balance on credit cards, living below your means and so on.

This line of thought is intellectually appealing to a lot of people but I can tell you first hand getting people to actually live this way is much tougher than getting them to think of living that way as being a good idea.
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The Big Picture For The Week Of February 10, 2008

No video this week or next.

After the close on Friday I saw a segment on the network with a mutual fund manager and a chap who I believe is a strategist at one of the big banks. Both felt that there were a lot of values out there to be had in places like financials and retailers and they didn't seem to be particularly concerned with the threats of bear market and or recession.

I know some of the theories as to why people like this go on TV to deliver these sorts of messages and I understand most of the theories in this regard but I can't really reconcile why they feel the need to do this.

It makes more sense to me to reiterate the extent to which cycles and the occasional down turn are normal events, they often have similar contributing factors and investors need to decide whether they should take any defensive measures to mitigate the full brunt.

Telling people its ok, don't worry seems more likely to incite panic at the bottom than studying how the market really works (slow declines versus fast declines as one example) as opposed to pointing that bear markets are guaranteed to come along every so often.

Valuations for financials only look cheap if you assume the estimates are correct--how many people really want to make that bet?

Even if you have no analytical ability whatsoever in terms of knowing when the bottom might come you don't need to be Warren Buffet to realize things in the stock and bond markets aren't quite right these days.

The two gentleman in the segment referred to above do a great disservice by not really acknowledging that there are problems and that getting in now might be a good price relative to five years from now but that there could be some serious grief first.

Compare this to Whitney Tilson who came on earlier in the day and owned being early on a couple of purchases last year and conceded that buying now could be a huge home run or not.
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A Shopping List You Should Make?

A little over a year ago I wrote about investing like a turtle, inspired by a blog called Money Turtle. Rightly or wrongly (not sure which) I said I thought of investing like a turtle as kind of a conservative dividend centric approach (but I may have that wrong).

Either way, thinking about this from the tortoise and the hare point of view a reader recently left a comment on the blog about adapting to a new, for him, style of managing his portfolio.

Bear markets (or maybe just prolonged corrections) tend to induce soul searching in this regard. If you are searching your soul about how to structure your portfolio so you don't get hurt again fair enough but the sorting out of a bear market is not the time to implement permanent turtle-like changes.

Bears end and often the bounce looks like 2003 (the S&P 500 was up about 26% that year). If you have absorbed the full brunt of this decline you should probably consider sticking around for the bounce that will probably come. I am not saying take no defensive action but a permanent sale of equities here is selling pretty low.

Some may want to cut back on straight equity exposure in favor of lower octane like long short, currency, buy write, put write (if it ever comes), managed futures, merger arbitrage, emerging market bonds and so on.

The lower octane aspect is appealing on some level to just about everyone with the obvious trade off of lagging the next time the market is up 26% in a year. Now is the time to learn about these parts of the investing world and how to access them. Later will be the time time to implement, if this is what you feel you need to do.

While I am all for some exposure to this sort of thing, going 100%, although easier and safer to do than in the past, is probably not the right thing for too many people, the title of the post notwithstanding.

I will say that going more than 3-4% into absolute return might be a reasonable idea as I do think it is a valid asset class and there are enough disparate strategies (like the ones mentioned above) that you don't have to make too big of a bet due to a lack of choice.

Asset allocation is evolving, for the better I think, and moderate allocations to new things, once properly studied is ok.
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Shazbot!

So things are at best struggling and Cisco looks like it is going to wreak some havoc because of the guidance.

After a couple of lousy days maybe the Cisco hit (if it even lasts until the open) can turn around in some sort of oversold-ish snapback. I don't know but fear seems like it has inched up a tad this week.

I saw Louise Yamada on Fast Money (CNBC Asia was preempted, maybe its Golden Week?) and she had all sorts of ominous things to say about the market.

Who knows? We all have opinions but who knows?

One aspect, the only aspect really, that matters about the type of pre-planning I have preached about in the past is the extent to which it relieves having to make decisions when it is hitting the fan. What I mean by this is that in planning ahead what you would do when the bear market comes you make the decisions ahead of time, you simply need to execute them when things are hitting the fan. Not having to craft the strategy now, or a month ago, makes it much easier.

Emotional responses are the downfall of many a market participant. Knowing this it seems only logical to remove the threat of emotion by mitigating it long in advance. I have had roughly the same plan since before this site started and have written about so much that I probably lost readers as a function of the repetitive nature of the posts but now that a bear appears to be a couple of months old you can get some sense of why I wrote about this sort of thing so often.

Any sort of defensive action taken with any reasonable catalyst has probably been a help. Of course the other thing is that bear markets are normal and this bear will end, giving way to a new bull regardless of anyone's ability to know when or how bad it gets first.

I can't begin to express shoulder shrug this evokes because it is just a part of the cycle just like you know that most of the time you are not sick with a cold but you know you will get one at some point in the future or unless you wash you hands 100 times a day or never leave the house (kind of guilty myself, I haven't had a cold in quite a few years; try oil of oregano as soon as you feel one coming) which would be the investing equivalent of just rolling t-bills or CDs.
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Some Notes

First there have been some great comments left in the last couple of days but unfortunately I probably can't reply to as many as I would like because of the travel and needing to still do my job while I am here. "Money never sleeps." GG circa 1987.

But a couple... one reader asked asked about trying to win the falling knife dance with the financials. Well, I don't know the answer of when the bottom will come. I do know that a normal yield curve (for now parts of it are kind of normal and other parts not so much) creates a fundamentally sound back drop for the financials to conduct business. Normalization could come before, at or after the bottom, I don't know.

One aspect of this entire saga that is a little bigger picture is the normal nature of cyclicality. In asking when on anything you need to first ask yourself whether you think this is a bear market, recession or worse. I am not in the worse camp but your answer here is crucial. If you think bear market or recession then you need to know that the process of bottoming takes close to a year and occasionally longer.

Long time reader SLMasker shared going through a period of second guess in the last few days. I don't think she was beating herself up, I took the comment as more of a cathartic lament but either way this is a period where mistakes are common; no one is immune. The best remedy is to avoid big bets. The double short fund has served as a great tool (for me anyway) but 25% of great is an enormous bet, conversely 100% moved in during the last couple of days guessing at a bottom is a different kind of enormous bet. Just be patient.
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More Airport Blogging

Here I am in Honolulu waiting for our connection over to Hilo just starting to write this post. I sit in this spot to plug in every time.

I have been catching up on what happened while I was watching Kung Fu reruns on the plane (no joke), I've got Northern Exposure and Crime Story for the ride home.

I saw the market open on the ISM print and obviously it puked down from there.

Over the weekend I blogged about wondering if I was wrong and whether I should get more long. I expressed a second guess but that I had no intention of doing anything differently which was the case, no widespread trades this week.

So my second guess came at a top of sorts. This is a great example of how to manage emotions/thoughts/whatever. Doubting yourself is part of the equation of participating actively in the market. Succumbing to emotions/thoughts/whatever in a panic doesn't have to be.

One aspect of this site is a look over my shoulder at what I am thinking and this sort of "what if I am wrong" moment is a great example. It is ok to experience these. Obviously at this point I am glad I did not commit more but maybe we rocket off the low today and that's that, I don't think so but there is no way to know.

I guess the point is to realize you will have moments like the one I just had and knowing so ahead of time (I did know ahead of time) can spare you from a reactive trade that ends up being a mistake.

Questioning where you stand is common for many folks in the bear market process.

aloha.
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Airport Blogging

The chart is a YTD of the ASX 200 (that's Australia).

That it is Australia is not so important but the action the chart captures is.

If you click on it to enlarge you will see that the low close was 5186 on Jan 22 and I can tell you it closed today at 5792 which is an 11.6% snap back. That is a pretty hard bounce which serves as an example about selling into fast declines.

The decline globally from the fall was orderly and then accelerated in January, kind of a fast decline within a slow decline and like all fast declines the snap back was pretty hard.

It is easy to second guess yourself during fast moves in either direction. Second guessing is fine and if you have to sacrifice one name into a panic to relieve stress that is ok too but big portfolio changes during fast moves is probably a bad idea; 11.6% in two weeks?

I try to stress this sort of thing before, during and now (sort of) after. This has been the case with every fast decline since I have had the blog up. Fast declines, no matter when they occur (9/11 as a great example) offer some snap back.
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Is Your Home An Investment

Late start we had about 9 inches of snow and I had to shovel my way to the dish to clean it off for the interweb to work.

Robert Shiller was on the Connie Mack show this weekend and he said that he thinks people have too much of their net worth tied up in their homes. It also came up that the equity extraction of the last few years has been excessive.

The context of the discussion was home as investment. Other people will tell you that your home is not an investment, I lean more in this direction but like most topics the real answer is probably in the middle.

If someone buys a house with intention of being on to another house in a few years, I'd say that probably is an investment and so a market event that prevents the price from going up (the outcome doesn't have to be a decline it could just not go up) does hurt here.

If someone has been in the same home for ten years, has no plans of leaving and is not over mortgaged I'd say that this is likely not an investment and so a flat or down market probably does not impact this situation.

We plan to grow old in our cabin and the Hilo house is also a very long term proposition. I am sure there is no way we could get what we paid for it five months ago but it is not an issue. We bought the house to enhance our lifestyle.

Contrast that extreme to the people of the various flipping shows we all watch on the weekends. These people feel the market's fluctuation more than anyone--100% investment.

For planning purposes I offer no science just my notion of common sense. If you have equity in your home in the future, that is you are retired but not heavily mortgaged, then the equity can be utilized if you need it. I am thinking the most likely need would have something to do with care and or treatment for a health related matter but whatever. If you are lucky you would have all that equity and never need to tap it.

The numbers do favor having a mortgage, I concede that, but having access to all that equity, even if it is 15% less than it was 12 months ago is very comforting.

This discussion would not be complete (maybe it's not complete anyway) without addressing the current price decline. I am not in the down 20% camp but regardless of whether that is right or not, the real estate market is not permanently broken. There will be some value in your home and chances are that value will go up over time even if it does not go up at the rate you would like or as soon as you would like.

Hats off to the Giants for beating the Patriots. I think the key was the Giants defense prevented the Patriots from being the Patriots except for the drive that made it 14-10. I had an uneasy feeling about this game from a couple of weeks ago. It seemed like the Patriots have not played up to the standard they set for themselves a few months ago, maybe it was just me. I did think the Pats would win as they have won many games far from their best but they lost. Congrats again to the G-men.
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Sunday Morning Coffee

This week I had a chance to chat with a couple of clients, each of whom are retired, and each of whom try to grapple with that magic 4.4% withdrawal rate.

In general terms I am learning that 4.4% is not the difficult part but more the concept of a limit at all. It seems common that people very often need more than whatever amount is prudent as function of very reasonable human nature.

The notion of a limit is new to many retirees and so is not easy. My job is not to tell anyone no but to try to help them see how the probabilities work at various withdrawal levels.

Another fly in this ointment, but it comes up in the planning process, is the unexpected event that must be paid for. One client is having an unexpected come up later this year, their daughter's wedding. It's a positive thing but it is also outside the normal budget for a given year.

If you think about it for a few minutes you could probably come up with four or five positive outlying events that could come up over the course of a retirement that could be budget busters. This makes me wonder if 4.4%, which as I recall does not offer a 100% success rate (more like 96%), is too much?

My personal views on this are rather harsh and I don't lay this on clients when I meet with them but the problem is not that too may folks live beyond their means, I think it is that too many people do not understand the consequences of living beyond their means.

My parents had problems along these lines when they were still married (and my sister inherited this gene as well) and so my thoughts are molded from their mistakes but quite simply; whatever you got, take 4% out and if that plus social security is not enough get a part time job of some sort. You need to do whatever it takes.

I believe I have the cred to say this. A few years ago as I was just getting started in my current phase of my career and only had a couple of clients I did work around Walker that included putting on a roof, logging and building an enormous rock wall. I did it because that's what it took.

I do not minimize the real emotion that this causes, not at all, but the back drop to the dilemma is that the numbers work a certain way regardless of anything else. Emotion is the bigger variable. The magic number is 4.4%, period.

Tough post but I think more thought needs to be given to what this really means in the big picture and what it will mean specifically to you.

The picture is from Hilo, we are headed there Tuesday morning.
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The Big Picture For The Week Of February 3, 2008

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The Best February Ever!

If we can average 1% per day for the month, like we are starting out we'll have the best February ever.

The futures obviously got a huge boost from MSFT buying YHOO.

It seems to me I sold Yahoo into a rumor about this deal last May and now it is happening for real. Very funny.

The averaging 1% per day is obviously a joke but as I mentioned the other day, massive feel good rallies in short periods have happened before so why not again?

Are you feeling good? I am feeling so good that I am wondering if I am wrong. I shaved off a portion of a stock yesterday into the rally as I view this as typical bear market behavior but I can't rule out that I have this wrong, this is always a possibility.

And there go the futures back down on a bad jobs number, no wait the revisions are not so bad, or are they?

The market may take a while to figure the jobs report out but the important number was negative, well until the revision next month lol.

I will say this type of volatile rally is consistent with bear market activity but maybe I do have it wrong after all?
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