In light of the ongoing European financial crisis, Rocky is pleased to learn that the European Central Bank now provides visitors to their headquarters with a “hard hat” at no cost! However, they do ask visitors to ”wear socks.”
No mention is made whether visitors must empty their pockets of spare change upon entering.
For a full text of the ECB’s dress code, see “What to wear” at:
A recent article in the Orange County Register reminded Rocky of the glory days from Baywatch , (the most-watched TV show of all time.)
The newspaper article explained that being a REAL lifeguard may be a better gig than being a TV lifeguard!
From the newspaper story: “According to a city report on lifeguard pay for the calendar year 2010, of the 14 full-time lifeguards, 13 collected more than $120,000 in total compensation; one lifeguard collected $98,160.65. More than half the lifeguards collected more than $150,000 for 2010 with the two highest-paid collecting $211,451 and $203,481 in total compensation respectively. Even excluding benefits like health care and pension, more than half the lifeguards receive a total salary, including overtime pay, exceeding $100,000. And they also receive an annual allowance of $400 for “Sun Protection.” Many work four days a week, 10 hours a day.
The article continues: “On face, the compensation packages for these guards are staggering. But take into consideration the retirement benefits being paid to currently retired lifeguards and lifeguards who will retire at these pay levels in the future and the problem is further compounded. Lifeguards are able to retire with 90 percent of their salary, after only 30 years of work at as early as the age of 50.”
The entire story can be found here: http://orangepunch.ocregister.com/2011/05/10/lifeguarding-in-oc-is-totally-lucrative-some-make-over-200k/44783/
[Disclosure: Although Orange County generously provides a $400 "sun protection" allowance, Rocky notes that they do not yet provide a plastic surgery allowance. Pamela Anderson wannabes should take note...]
Zillow.Com is a nice website that “values” properties across the country. But sometimes Zillow gets a little too cheeky.
Their “zestimate” for 1600 Pennsylvania Avenue is $251,617,000. For only a monthly mortgage of $1,036,276, you can enjoy 16 bedrooms and 35 baths in this 55,000 sq. foot mansion. (Built 1752). See: http://www.zillow.com/homes/1600-pennsylvania-avenue-washington_rb/
Zillow says the White House market value declined 25 % since the peak of the housing boom. Hence Rocky believes it’s a great time for value-oriented condo-developers to swoop in. (“Great views, working fireplaces, bullet-proof windows, great yard for the kids and dogs….)
[Disclosure: Rocky continues to shop for a nice vacation home, but he hates DC's muggy summer weather.]
For long-term investors with a dedicated portion of their portfolio in bonds, Rocky believes that there’s currently an opportunity to reduce exposure — without reducing return.
The “trick” is to extend maturities with a portion of their bonds, and to put the balance of their exposure in cash. This is called a bar-bell trade (named after the exercise equipment) — and the steepest yield curve in 30 years (see chart) provides a rare opportunity to do this trade.
Here’s an example of the mechanics.
An investor has $100,000 in the Vanguard Intermediate Term Investment Grade Bond Fund. This fund yields 3.1% and has an average duration of 5.3 years.
If the investor sells that fund, and buys $58,000 of the Vanguard Long Term Investment Grade Bond Fund which yields 5.4% with a duration of 12.9 years and puts the other $42,000 in FDIC insured money market funds yielding 1.0%, a number of virtuous things can happen:
1) If nothing happens, the cash yield of his portfolio has increased by a little bit. Before the re-allocation, his portfolio was producing $3100 in income, and now it’s producing $3500 in income.
2) The investor has increased his cash balance, and since no one really knows what the future will hold, it’s always good to have lots of cash. If interest rates rise , the investor will be able to put the cash to work at higher yields.
3) If interest rates rise, the yield curve is likely to flatten (based both on history and standard economic theory). That is, short-term rates ”should” rise more than long-term interest rates. So, even though the re-allocation results in a longer duration (7.48 versus 5.3), in most scenarios this risk is overstated. Also, the risk is lessened due to the 42% cash cushion. So the practical increase in duration should be less than the theoretical increase.
4) The investor has sold the portion of the bond market that is being levitated by the Federal Reserve and purchased a portion of the bond market which is being set by market forces. (Most of the Fed’s purchases are under 7 years in maturity.) So, when the Fed stops buying or reverses its purchases, the re-allocation should have less market risk in the short maturities that usually rise the most during tightening cycles.
5) With short rates at zero, there’s nowhere for rates to go except up. However, if the USA is in a Japanese-style depression, the only yields that can still decline are the ultra-long maturities, and one might experience a “bull market flattener”. (This is a low probability event.) Due to its modestly increased duration and position on the yield curve, the re-allocation would likely outperform nicely during a bull market flattener. Additionally, the stock market will be weak in this scenario, and the 48% cash balance might be useful for purchasing some stocks at much lower prices.
Where does this strategy look worse? If all interest rates across the yield curve move higher by the same amount , then the modestly increased duration can cause an underperformance, and if the yield curve steepens even more, there can be an underperformance. Remember: Rocky isn’t suggesting to just move out the yield curve with the same amount of money… It’s important to tuck about 48% of the portfolio away in safe money market funds . Remember also that when rates rise, bond prices decline. So if interest rates rise a lot, all bond investors will lose money. The underlying theme to this re-allocation is “less exposure — same return.”
[Disclosure: This is NOT investment advice...see the Disclaimer at the top of this page! It's just something that Rocky noticed and investors should think about. It's also an observation that the yield curve is steepest its been in 30+ years. If the 30-year bond keeps rising in yield -- and the Fed keeps rates at 0%, then this strategy will not be attractive. There's no reason to think that today marks the maximum steepness. Lastly, Rocky doesn't have an opinion about when rates will rise; but they eventually will. But as Keynes supposedly said, "In the long run, we're all dead." ]
Rocky’s read a lot of information and mis-information regarding Quantitative Easing. This may be the best and clearest discussion of the issues and is worth a read:
[Disclosure: Rocky rarely agrees with Professor Landsburg, and finds some of his philosophies to be morally objectionable. Nonetheless, the Professor does a good job explaining the pros and cons of QE2 in his article.]
Rocky noticed that his friends see bubbles in bonds, in gold, in stocks, in cotton, sugar and grain prices. In fact, his friends see bubbles EVERYWHERE!
It appears that there may be a bubble in bubbles. And a look at “Google Trends” confirms this bubble. However, this bubble-in-bubbles popped early in 2010 — on the 50th Anniversary of Bubble Wrap!
[Disclosure: Rocky never gives investment advice. When asked if or when the current "bubbles" will burst, he started foaming at the mouth.]
As regular readers know, Rocky has held a bullish speculative position in gold for many months. If today’s behavior continues for a few more days, Rocky believes that gold may be finally entering the Manic Parabolic Blow-Off Phase “MPBOP.”
The MPBOP is the most profitable phase of any bull market, and despite what experts on CNBC say, it’s impossible to know how long it will last — nor how high prices can go during the terminal stages of a MPBOP. Rocky speaks from experience having been on the wrong side of the internet MPBOP. (He was an avowed hater of the Pets.Com puppet, but he got revenge when the stock eventually went to zero.) This experience means Rocky wouldn’t scoff at $1500/oz or even $1800/oz gold by year-end.
Sadly, after the parabolic blow-off phase comes the “gravity still exists” phase, where people re-discover that gold is just a shiny piece of metal that makes an excellent dental crown. Which means prices will decline. By a lot.
Many people party on New Year’s Eve without worrying about how they feel on New Year’s Day. But not Rocky! Rocky remains long gold, but he’s beginning to think about his ultimate exit strategy. Parachutes? Ejection seats? Hari Kari? Here’s his latest thinking (posted on the blog Daily Speculations): http://www.dailyspeculations.com/wordpress/?p=5344
[Disclosures: Rocky really has no clue what gold prices will do tomorrow or the days after tomorrow and his ruminations are not investment advice. He does, however, believe in the Laws of Gravity and the First Law of Rocky: In every “macro market” (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. Additionally, while Rocky currently remains long gold, he also owns hedges against the proven risk that he's more-than-occasionally wrong.]
The ASE Index has 49 members and Rocky had three simple criteria:
(1) A strong balance sheet — (i.e. not a lot of debt).
(2) A reasonable return-on-equity over the past few years.
(3) Some evidence of earnings growth over the past 8 years.
Amazingly, out of 49 stocks (Hellenic Coca-Cola excluded,) only two stocks passed these pathetically undemanding tests:
Metka S.A. — a manufacturer of heavy equipment used in mining and ports. Unfortunately, this stock is actually up 3% year-to-date, so the market knows this is a decent company.
Jumbo S.A. — a chain of retail stores that sells toys and baby products. (Rocky rarely pays retail. He likes wholesale.)
Iaso, SA, a company that provides obstetrics and gynecological services did not make the cut, however, it might have been a pairs trade with Jumbo SA. (Short the OB/GYN, long the baby toys?)
[Disclosure: Rocky never gives investment advice. However he concludes that while the Greek stock market may rally on a resolution of their debt crisis, he doesn't see any compelling investments...and the country seems to lack any listed world-class enterprises. As to the question, "What's a Grecian Urn?" the answer is around $30,000 per year. But that's evidently tax free, with an early retirement too.]
College years are sometimes referred to as the “best four years of your life.”
Whether or not this is true, they sure beat the last four years of life for a Sallie Mae shareholder. (negative 76% total return).
And the next four years don’t look good either.
From Bloomberg: “SLM Corp, the biggest US student loan company, tapped the bond market for the first time in two years, paying more in interest than it charges [college students for their loans.]“
SLM sold $1.5 Billion of 8 percent notes due in 2020 at a yield of 8.25%. Stafford federal studen loans have a fixed interest rate of 5.6%.
Bright college years … ahh.
Rocky enjoys receiving free toasters and other perks when he opens a new bank account. But for the first time ever, he found a bank that offers a bonus for CLOSING a bank account!
The Nevada Federal Credit Union announced that they are paying savers a $25 bonus if they withdraw $25,000, and a $75 bonus if they withdraw $75,000. The full story is here: http://www.lvrj.com/business/credit-union–pul-lease-take-your-money-86320527.html
Rocky wonders whether this is the beginning of a nationwide trend? Will his local Exxon station will pay him $25 if he goes across the street to Texaco? Will Verizon Wireless pay him $50 to switch to AT&T?
[Disclosure: Zero Percent Interest Rates seem to be causing unexpected consequences.]
The Company said the waffle shortage lowered the company’s fourth-quarter sales by 2 percent, and the stock is down 5%. See: http://www.bloomberg.com/apps/news?pid=20601103&sid=aqjyWpquFFmI
Rocky noticed the signs at his local grocery store that apologized for the Eggo shortage. Luckily, as part of his Y2K disaster preparation, Rocky kept a stockpile of waffles and Tang in his generator-powered underground bunker.
He’s currently checking the prices on Ebay to see whether he can unload his waffles at a profit.
A representative of the National Waffle Association, (yes, it exists), declined to comment on Rocky’s arbitrage activities.
[Disclosure: Trophy Wife is not fond of frozen waffles for breakfast. She's strictly a fresh banana and Special-K kind of gal.]
Rocky lacks any substantive insights on today’s AIG grilling of Treasury Secretaries Geithner and Paulson by the House Oversight and Government Reform Committee. So he’ll instead focus on the important stuff.
Rocky notes that both Geithner and Paulson appeared to be wearing waterproof scuba diving watches.
Geithner’s watch came before the camera as he was pointing his index finger at the committee in a Clintonesque “I did not have sex with that woman, and even if I did, it was in the best interests of American Taxpayers” moment.
Paulson’s watch came before the camera when the Committee ran over Paulson’s self-imposed time limit, and he “graciously” agreed to stay for an extra eight minutes. The eight minutes ran to ten minutes, and Paulson objected. The Committee Chair graciously acknowledged Paulson for providing an extra two minutes.
If Paulson and Geithner had been Secretaries of the Navy, the waterproof watches would make more sense.
Perhaps Geithner chose a waterproof watch to protect against a waterfall of tears. In contrast, Paulson was probably enroute to a flyfishing date with Robert Rubin, Tiger Woods and Dan Rather at “The Perfect Cast,” a resort who’s list of celebrities is a who’s who of the morally challenged.
Ally Bank sent Rocky a letter apologizing for failing to pay interest on Leap Day 2008. Rocky grew excited at his unexpected windfall, until he sadly realized that anything times zero is still zero. And bank interest rates are extremely close to zero!
Rocky was also surprised by the Leap Day interest because his trusty Monroe Bond Calculator (vintage 1986) always assumed 30/360 for interest calculations.
Perhaps the biggest riddle is why the calculation error affects accounts “that were opened or matured between March 1 and December 31, 2008″ — since Leap Day was February 29, 2008.
Ally Bank, the retail banking subsidiary of GMAC, last week received an additional $3 Billion in US Government bail-out funds….perhaps for leap day interest payments?
This morning Bloomberg News reports, “The Powershares DB US Dollar Index Fund suspended distribution of new share baskets after exhausting its capacity to create stock under a registration statement with the Securities and Exchange Commission.” The ticker symbol is UUP, and it moves with the Dollar Currency Index. That is, when the Dollar increases against the Euro and Yen, the UUP goes up in price.
Translation: Sorry folks, we’ve run out of dollars!
[Dislosure: Rocky recently bought a "slug" of UUP calls as a trade. If the UUP trades at a substantial premium to it's net asset value because of this "shortage," Rocky will gladly sell his UUP dollars to the hungry buyers for more than a Dollar. This is a temporary technical/arbitrage condition. Rest assured, the Federal Reserve's printing press is still running 24/7.]
As part of “Quantitative Easing,” the Fed purchased $1.02 TRILLION worth of “Agency MBS securities” (aka home mortgages) in the open market. The Fed will complete their purchases within the next 90 days. As the chart above shows, they will have purchased a total of $1.72 TRILLION of securities including $1.25 TRILLION home mortgages.
Putting this in perspective:
In 2009, home buyers borrowed a total of $1.01 Trillion. ( See: http://www.sifma.org/research/pdf/Mortgage_Related_Issuance.pdf for the data.)
The Fed has purchased EVERY new home loan made in 2009, and they pegged mortgage rates at an entirely arbitary yield !
Ladies and Gentlemen: The Federal Reserve has left the building!
Once the Fed steps back from the mortgage market, the “free” market will re-price home mortgage rates…presumably at higher yields. Rocky doesn’t know if the upward move in mortgage rates will be violent or gradual, but it will happen — and it will dwarf the effect of Congress’ homebuyer tax credits. It behooves homebuyers to bear this in mind when they consider when to lock in a mortgage rate.
[Disclosure: Rocky acknowledges that the one Elvis reference in this post was weak. So he'll add a second one: Elvis said, "The only thing worse than watching a bad movie is being in one."]
For the auction catalog, click on : http://www.proxibid.com/asp/Catalog.asp?aid=23422
Rocky looked through the odd collection of watches, necklaces and Lynn Swann-autographed footballs (“certificate of authenticity not included.”)
He decided that Lot #7, a heart-shaped pendant would be a perfect Valentines Day gift for Trophy Wife.
Fast forward to Valentines Day 2010….
Rocky (to Trophy Wife) : “Honey, I got you a special present for Valentines Day.”
Trophy Wife: “That’s nice. What did you get?”
Rocky: “It’s an 18KWG heart-shaped pendant set with 7 princess, 4 half-princess & 40 baguette cut diamonds, total weight 2.75 cts.”
Trophy Wife: “Why is it in a brown paper envelope? And not a nice blue Tiffany box?”
Rocky: “Because I got it special. It was a deal.”
Trophy Wife: “A deal? That’s typical. Let me see, what’s this little paper tag with a star on it? Hmmm. Marshalls??? You bought me a piece of jewelry at Marshalls????”
Rocky: “No, silly. That’s US Marshals. I always think of you as the Wyatt Earp of our family.”
(Unimpressed, Trophy Wife examines the heart under her jeweler’s loupe.)
Trophy Wife: “Rocky, these diamonds are fake.”
Rocky: “I guess I should have known better. The price was too good to be true.”
[Disclosure: Jewelry gifts purchased at the Madoff auction may contain dangerous levels of bad karma.]
Over at Jeff Watson’s excellent blog, he’s been debating whether gold is going up or going down. Rocky asks a slightly different question, “At $1,000 per ounce, is gold expensive?”
The following graph shows the behavior of gold and the behavior of the US Consumer Price Index going back to 1947. While examining this chart, it’s important to remember that:
1. It was illegal for US citizens (anywhere in the world) to own gold from 1933 until 1974.
2. In 1944, the “Bretton Woods” agreement fixed the price of gold at $35 per ounce.
3. In 1971, President Nixon unilaterally took the USA off a gold standard, and from then to the present the value of gold (and the US Dollar) were allowed to float freely.
So, the question remains, is gold expensive at $1000 per ounce? As those annoying math textbooks like to say, “the answer is left as an exercise for the reader.”
The black line is the CPI Index. The yellow line is the price of gold. Both values were normalized to make the visual relationship easier to see.
Rocky just learned that “man’s best friend” is being blamed for contributing to insurance giant AIG’s collapse, as well as the skyrocketing cost of health care.
The Insurance Information Institute reports that dog bites represented a third of all homeowner insurance liability claims in 2008, and cost insurers $387.2 million, up 8.7% from 2007.
“In the last year, the number of claims rose nearly 9% from 14,531 to 15,823. More than 4.5 million Americans are bitten by dogs each year, with nearly 900,000 requiring medical care, according to the Centers for Disease Control and Prevention. In 2006, more than 31,000 victims required reconstructive surgery.”
Click here for the Insurance Information Institute report entitled “Avoid Being Bitten By A Lawsuit By Being a Responsible Dog Owner:” http://www.iii.org/Press_Releases/Avoid-Being-Bitten-With-a-Lawsuit-by-Being-a-Responsible-Dog-Owner.html
[Disclosure: Rocky lives in a state where repeat Felons face a "three-strike-and-you're out," mandatory life sentence. His state also has a "One-Bite Rule"where the owner is not liable for the first bite, but is fully liable for the second. Rocky believes that the Criminal and Dog Laws should be harmonized ... so either wayward dogs get three bites or repeat felons only get two. Accordingly, Rocky hopes Congress convenes a special Committee on Canine Culpability. ]
For really great Super Bowl parties, Rocky’s neighbor would ”buy” large-screen TV’s at Circuit City on Saturday, and then return the TV’s the following Monday morning for a full refund. No questions asked. No cost. (Except that Circuit City eventually went bankrupt.)
This morning, GM announced a similar no-questions-asked, 60 day full refund on its cars. The promotion is called “May the Best Car Win,” and GM Chairman Whiteacre coyly “declined to put a price tag on the overall promotion.” That’s probably a good thing, since US Taxpayers are paying for this.
Click here for the full story from the NY Times: http://www.nytimes.com/2009/09/11/business/11gm.html
Forget about free toasters for opening new bank accounts. Forget about value meals at fast food restaurants. For consumers with a chunk of cash in their checking accounts, this is the largest giveaway in recent history. (An even better deal than “cash for clunkers.”)
Although the exact details have not been disclosed, here’s Rocky’s arbitrage analysis:
1. Money market funds are yielding approximately 0%, so there is no cost of money.
2. Buyers empty their savings accounts and purchase a new GM car. They pay cash.
3. Title and registration (non-refundable) will cost about $250. Sales tax will be refundable if the transaction constitutes a “return.”
4. After 60 days, the car gets returned to the dealer. (And GM has lost 10%-15% of the car’s value.)
A Hertz rental car for 60 days will cost about $3,000. A GM “rental car” for 60 days will cost about $250.
[Disclosure: Rocky has no position in Hertz Group (HTZ) or Avis Group (CAR). He does have a position as a citizen and taxpayer in the USA.]