Updating the “Magazine Cover” Indicator

Rocky occasionally peruses his favorite magazine store for investment truths using the “Magazine Cover Contrary Indicator.”  Unfortunately, Rocky’s local store doesn’t sell Time, Newsweek or Business Week.  Rocky’s local magazine store sells mostly lurid  “periodicals,”  “videos,”  and cigars.

Hence, Rocky needed to develop his own contrary media indicator — independent of  bulls, bears, and cleavage.

He found one!!

Bloomberg Radio occasionally adjusts their hourly market summaries.  Bloomberg  no longer even mentions the overnight change in the Japanese Stock Market (up 15% year-to-date);  but instead they quote the “yield spread”  on defaulted Greek Bonds. For Rocky, this is a very bullish omen for Japanese stocks. And it also means that Greece is irrelevant. (Rocky also noticed his local magazine store has increased its inventory of extremely lurid Shukanshi.)

[Disclosure: Rocky NEVER gives investment advice and he reminds readers that sometimes a “Cigar is just a cigar.”  However, he confesses that this “radio indicator” contributed to his decision to recently buy some Japanese stocks (currency-hedged) such as the DXJ and NKY Japanese Stock ETF’s.  He may stay with this position for a long time, or he may spit it out tomorrow like a bad cigar.]

Investment advice for Ron Paul

Rocky never provides investment advice. But for once he’ll violate this  rule and offer some advice to Congressman Ron Paul.

Members of Congress must file financial disclosure forms which show all of their assets and investments. Rocky studied Rep. Paul’s portfolio from 2003 to the present. http://www.legistorm.com/memberdisclosure/413/Rep_Ron_Paul_TX.html

Ron Paul’s portfolio violates every principle of sound money management. It is not prudent. It is not sensible. It is volatile. It is speculative. And it may give a window into Ron Paul’s perspective on the economy and free enterprise.

From 2003 to the present, Ron Paul’s stock portfolio owned only gold stocks. He owned some real estate. He had some cash. And he owned mutual funds that make money ONLY WHEN the stock market declines. He did not own any gold bullion. And more recently, he purchased more gold mining stocks and added to his bearish bets on the stock market using leveraged bearish funds.

In 2003, the value of his portfolio was between $860,000 and $2,300,00. (The disclosure form only provides a range of  values.)  In 2010, his portfolio grew to $2.4 million and $5.5 million.  (Gold stocks have declined between 15% and 30% in 2011, so his portfolio has declined commensurately. He will declare that loss next year.)

So, over an an 8-year period his portfolio has appreciated by about 12%/year. (And after this year’s losses for gold mining stocks, it will be a bit less than that.)

Not so bad, eh?

Nope!

If, instead of being such a wiseguy, he had instead just purchased gold bullion, his return would have been 55% better — returning an impressive 18.5% per year!  (It’s very strange that Ron Paul doesn’t own any bullion. And a skeptic might wonder whether he owns bullion, but failed to disclose it.)

[Disclosure: If one extrapolates the profile of his portfolio, one must conclude that he either nailed the bottom of the gold market, or he has really lousy long term performance. Remember that (even after this 10 year old rally) gold has appreciated at only about 5% for the past 30 years, while stocks have returned about 11%, and long bonds have returned high single digits. More troubling, however, is the notion that a  President of the United States would personally profit from a DECLINING stock market and a declining economy! Even Barack Obama’s assets include some S&P Index Funds….]

Why Groupon resembles a ‘roach motel’

The term Roach Motel (“where roaches check in, but they don’t check out!”) was coined by Black Flag pesticides in a decades-old advertisement.  Judging from Rocky’s recent experience, Groupon membership is quite similar.

Groupon (GRPN) went public recently after some substantial kerfuffles with the SEC. In their IPO filing, GRPN said that they had over 50 million subscribers as of December 2010 (page F-37 of SEC Form 424B4) and by September 2011, that number had grown to 143 million!!  Notably, in 2009, GRPN had only 152,000 subscribers (of which 43,000 made purchases) whereas in 2011   29.5 million purchases were made by the 143 million subscribers. This means purchase activity among Grouponers declined from 28.3% to 20.6%. (If one considers that 16 million customers made multiple purchases, the activity percentage is declining much faster.) That GRPN paid people real cash to “join,” and that they have never been profitable is beyond the scope of Rocky’s “roach motel” insight.

Rocky doesn’t  like crowds, and he didn’t like being one of the 143 million Grouponers.  Also, as a bald man,  he loathed  the daily 20%-off Groupons for hair removal services. (There were never any discounts for hair retrieval services.)  Fed up,  he tried to “cancel” his Groupon membership yesterday. Alas, there was NO ability to do that on their website, nor were there ANY  instructions on how to cancel membership.

Rocky sent an email to GRPN “customer support” with the question: “How do I cancel (and close) my Groupon Account?”

The response:  “You will no longer receive any promotional emails from Groupon. Please note that in the future you may receive transactional emails regarding past or future purchases made though your account and important business announcements that could affect your rights as a customer. You may receive an email if we update our privacy statement or our terms of service.”

Presumably this means that GRPN still numbers Rocky as one of the 143 million, but they won’t send him any more emails for nail salons, cooking classes, and discount sushi.

Gone, but not forgotten….

The cancellation experience reminds Rocky of  Antony’s speech from Shakespeare’s Julius Caesar,  “I come neither to bury Groupon, nor to praise them. But the evil email address that Groupon captures lives on after them.”

[Disclosure: Rocky never provides investment advice and currently has no Groupon stock position. He notes, however, that Black Flag Roach killer comes in both “fragrance free” and “fresh pine scent.”  Here, he smells a rat.]

David Hasselhoff, Baywatch & California finances

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…]

CPI shows women & children first?

The Captain of the Titanic supposedly said, “Women and children first!” when directing his passengers to the lifeboats.

Rocky, (hardly a chivalrous fellow), thinks recent Consumer Price Index data demonstrate “Women and Children LAST!”

He notes that women’s and children’s apparel prices are declining at a noticeably faster rate than men’s apparel prices. (See the bottom three lines of the chart above.) Although Rocky continues to wear the same ragged grey sweater and chinos, Trophy Wife may find this data to be an impetus for a visit to the shopping mall.

Rocky theorizes that women can wear men’s clothes (which support the price of shirts and pants), whereas most men wouldn’t be caught dead wearing a dress or skirt. However, if this trend continues, Rocky’s miserly nature will prevail, and he’ll try on a kilt or two.

Calculator batteries & tax returns

IRS data show an epidemic of  “math errors” on personal income tax returns. 

During calendar year 2007  the IRS  counted “only” 3,885,505 mistakes. Yet in calendar year 2010, they counted 10,554,735.  That’s a shocking 272% increase in arithmetic mistakes. The full IRS data set can be found here: http://www.irs.gov/taxstats/article/0,,id=207345,00.html

The IRS says math errors “include a variety of conditions such as computational errors, incorrectly transcribed values, and omitted entries identified during the processing of returns.”

Rocky wonders whether the epidemic of errors is due to the widely reported declining math skills of Americans. (“One-quarter of students at undergraduate and graduate levels believe that 1 divided by 5 = 5.”) Or perhaps it’s due to the increasing use of Turbotax (thanks to Treasury Secretary Geithner.)

[Disclosure: Rocky always changes his calculator batteries before starting his tax return, and highly recommends this practice for other law-abiding citizens. The IRS data did not disclose how many of the math mistakes identified were in favor of the government!]

Japanese stocks yield more than US stocks

For the first time in decades, the dividend yield of Japanese stocks exceed the dividend yield of US stocks. As of the close on March 15th, the S&P-500 dividend yield is 1.86. After last night’s 10% decline in Japan (and the horrific catastrophe unfolding there), the dividend yield on the Nikkei-225 is now 2.02%. (The chart above shows the S&P-500  dividend yield minus the Nikkei-225 dividend yield  using monthly data. It doesn’t include the post-earthquake  price moves.)

Determining whether this represents an investment opportunity, or an accurate reflection of the long-term prospects for Japanese industry,  is left as an exercise for the reader. Rocky notes that  Japanese 10 year bonds yield 1.21% and US 10 year bonds yield 3.24% — which makes this dividend phenomenon even more striking.

[Disclosure: Rocky never provides investment advice. He will also forgo  any jokes about the dismissal of the Aflac Duck because it would be inappropriate — as the Japanese people suffer the aftermath of a historic disaster. ]

Efficient markets meet efficient yogurts

At the behest of his daughter, Rocky sampled his first “Pinkberry” frozen yogurt in New York City’s Greenwich Village on Sunday. Pinkberry has a cult following, and it was time for Rocky to audition for the cult.

The small cup of plain with two toppings cost $6.25 — and while Rocky found the concoction uninspiring — he found the profit potential intriguing.

An unscientific 10 minute demographic survey revealed all of the customers in the store were ultra-skinny women under the age of 30 and just one skinny man (whose attire and makeup were sexually ambiguous.)  Judging from their fluency in Pinkberry nomenclature, all were regular customers. The tiny store was grossing over $300/hour — on a cold, rainy March afternoon!

Rocky started salivating. Not from the yogurt. From the profit potential!

But before he could grow lascivious about live cultures, Rocky looked out the window and noticed two stores across the street with “Opening Soon” banners in their window.  Red Mango and “YourGurt” had Pinkberry’s prodigious profits in their sights.  A frozen yogurt war would soon commence — and monopoly yogurt profits would undoubtedly become the first casualty….

[Disclosure: All that glitters isn’t gold, and all that shines isn’t Pinkberry pomegranate with strawberries. But the jingle is worth a listen: click here. ]

Rocky’s coif makes the Financial Times

Rocky’s daughter insists that Rocky is fake. He has a fake name. He has fake friends. He even has fake hair.

On the last point, a real reporter at the Financial Times agrees. Ms. Lindsay Whipp wrote a serious article in Wednesday’s FT about Japanese Government Bonds and quoted Rocky:

See- http://www.ft.com/cms/s/0/88bf1d5a-3eac-11e0-834e-00144feabdc0.html#ixzz1EtdJxVVH

The bald facts

Numerous investors who have shorted the Japanese government bond market have lost lots of money, writes Lindsay Whipp.

Some, such as US-based hedge fund manager who writes a blog under the pen name Rocky Humbert, literally lost their hair.

In 1996-97, he took a bearish view on JGBs. He recalls: “I aged badly, went bald and kept waking up my wife to check my Bloomberg.”

However, he had a very profitable 2008, having learnt “how markets can move in ways that don’t make sense to ‘reasonable’ people”.

[Disclosure: So is Rocky “real?” As the Clairol ad goes: Only his hairdresser knows for sure!]

Blended whiskey meets blended crude

American v. London Crude Price

An interesting oil trade reminds Rocky of the song “America” from West Side Story (the Broadway show): “I like to be in America!  OK by me in America!, Everthing free in America! For a small fee in America!”

Rocky notes the price of WTI crude oil in America is at a record discount ($15/barrel) to London’s “Brent”  Crude Oil —  even though the London oil is worth slightly less to refiners. Oil’s not  yet “free in America,” but 17% is a remarkable discount.

Some  production problems in the North Sea and an inventory overhang in Cushing, Oklahoma explain  this discrepancy. Since America imports crude oil, Rocky believes it’s just a matter of time before cargos get diverted  from the USA to Europe, and this price spread collapses. Hence, Rocky is slowly buying crude oil futures in America, and shorting crude oil futures in London.

If the spread doesn’t collapse in the next few months, Rocky’s Plan B is to fill his many empty Scotch Whiskey bottles with crude oil and “deliver”  the recycled bottles to London…(which will also force the aribitrage to close.)  Of course he’ll have to convince airport security screeners that  the duty-free bottles of crude oil don’t pose an in-flight threat, and will explain that instead of a blended whiskey, it’s the  “Brent blend.”  He’s also prepared to hear  the TSA Agent recite Anita’s words from West Side Story: “I know a boat you can get on.” See: VLCC.

[Disclosure: Rocky never gives investment advice, and these sorts of trades entail considerable risk not to mention a nasty hangover.  Nonetheless, this trade is a “Rocky V.”  (See “definitions”  tab at the top of this page.)]

Cold comfort: natural gas glut vaporizes

Buried in yesterday’s news cycle (and Northeastern snowbanks), Rocky noticed that the widely reported “glut” of domestic natural gas inventories suddenly vaporized. Or more accurately, it oxidized.

The Department of Energy reported yesterday  that Eastern US natural gas inventories are now BELOW their five-year average, and national inventories are in-line with their five-year average. See: http://ir.eia.gov/ngs/ngs.html

Rocky believes that  inventories remain ample. However, a  few more weeks of arctic cold weather, and natural gas consumers will feel the same chill that heating oil consumers have been experiencing. 

[Disclosure:   Rocky never gives investment advice, but he thinks natural gas is “cheap” compared to crude oil.  But that doesn’t mean the natural gas price will go up or the crude oil price will go down…. For details, see Rocky’s Definitions at the top of this page under Rocky I and Rocky V. ]

Reduce the deficit: sell the White House

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.]

The best kind of pay raise

Rocky just approved his employee paychecks for the first pay period of 2011. He noticed that everyone’s paycheck  increased by almost 2%.

“I don’t remember approving any raises!”  Rocky grumbled to his CFO.  “Especially not for Bosley in the mailroom. That’s the guy who nodded off while sitting in front of the postage meter — and his forehead wasted a few hundred dollars in postage stamps!”

“Rocky, it’s the tax cut,” explained the CFO.  “Congress passed a one year holiday on Social Security and Medicare taxes. Everyone’s paycheck went up by about 2%.”

“That’s great,” said Rocky.  “Allowing  people to keep their own money is always a good thing. But what should we do with all those wasted postage stamps? Maybe we should hand them out as holiday bonuses?”

[Disclosure: Reducing taxes is the most efficient  way to stimulate an economy.]

A lottery math problem

The MegaMillion Lotto Jackpot is now $237 Million. The odds of winning are about 1:175 Million. This means that if Rocky fills out 175 million lottery tickets, he is guaranteed to make a profit. (Assuming that he doesn’t have to share the prize.)

http://www.nylottery.org/ny/nyStore/cgi-bin/ProdSubEV_Cat_403_SubCat_337550_NavRoot_320.htm
http://www.megamillions.com/

But Rocky doesn’t want to stand at his local Seven-Eleven and fill out 175 Million tickets. (After he enters  Trophy Wife’s birthdate, the dog’s birthdate,  and his lucky number from inside of a Chinese Fortune Cookie, he won’t remember what numbers to pick.)  So instead, he will ask the Seven-Eleven lottery clerk for  175 Million “Quick Pick” tickets.

A “Quick-Pick” is a computer-generated random number lottery entry. The computer picks the numbers, so Rocky doesn’t have to think that hard.

Alas, this won’t work either. Because even if Rocky buys 175 million Quick-Pick, there is some chance that he will receive duplicate Quick-Pick entries … and there is some chance that he won’t receive the winning combination.

The chance of getting a duplicate Quick-Pick should be the same as the chance of winning the lottery. But in Rocky’s case, achieving this result is an illustration of really bad luck.

So Rocky poses the following math question: What is the OPTIMAL number of Quick-Pick tickets to buy? (The optimal number should maximize the chance of getting the winning combination, and minimize the chance of getting a duplicate combination.)

As always, the reader with the best submission will receive a unique prize of dubious monetary value.

The Billion Price Project @ MIT : A real-time CPI

Inflation, says Rocky, are rising prices for the things that you WANT to buy. Deflation, says Rocky, are declining prices for the things that you DON’T WANT to buy.

Although it uses a more analytically rigorous definition, there are many problems with the government’s Consumer Price Index (CPI). 

It’s exciting to announce that MIT has gone live with it’s “Billion Price Project” (BPP) — which monitors daily prices of 5 million items sold by 300 online retailers!

Here’s the link to the Billion Price Project:  http://bpp.mit.edu/

[Disclosure: It costs the Labor Department $234 million each year to calculate the CPI, and it’s only reported once each month.  For more details, see: http://www.slate.com/id/2278623/ ]

$7.2 Billion — This does not compute!

Mrs. Picower voluntarily agreed to return $7.2 Billion to the Madoff Trustee Recovery Fund.  As one of the largest beneficiaries of the fraud, she made the correct moral choice — but what was her real motivation?

Rocky figured this out!

He discovered that Mrs. Picower’s copy of Quicken Personal Finance Software crashed.

Quicken cannot handle dollar amounts larger than $99,999,999.99. Hence the $7,200,000,000.00 sitting in Mrs. Picower’s account was causing her computer to crash!

 Rather than rebooting the computer, she decided to boot the cash to the other victims.  For technical details, see: http://quicken.intuit.com/support/articles/using-quicken/reports-and-graphs/483.html  (The technical term is “maximum supported value.”)

[Disclosure: It’s difficult to imagine a checking account balance of $7.2 Billion. It’s even more shocking to realize that at  1% interest rates, she’s accruing interest at $200,000 per day! It’s worth noting that TurboTax does not list a “maximum supported value” so Internal Revenue Service Agents can relax…]

Black clouds, black sheep, red ink

A friend  writes: “About 18 months ago, I compiled a list of stocks for a buy-and-hold portfolio.  As of today, it’s down 3.2% (excluding dividends). Going back further, my “sure-thing” portfolio is down 9.7% (excluding dividends).

Rocky notes that since December, 2008, the S&P500 has risen about 42%, and the “average” (non-market-cap-weighted) stock has gained  about 75%. Interestingly, however, 57 stocks in the S&P500 have declined in price during this period!

Losing money during one of the biggest rallies in history is like walking around with a black cloud over one’s head. (A meteorological phenomonen with which Rocky is very familiar.)

In the spirit of the TV game show with-the-same-name, “The Biggest Loser” turns out to be Dean Foods Company (DF) which produces private label dairy products. Dean Foods has lost about 55% of its value during the past two years. The CEO of Dean Foods surely wishes that instead of “milking” his company dry,  he had invested in the poultry business — and raised a few “golden” geese, which could have flown above the black clouds.

[Disclosure: Rocky has never invested in Dean Foods. He welcomes bad puns that involve milk companies that turn sour, but acknowledges the futility of crying over spilled milk.  He also notes  that investing in a “boring” S&P500 Index Fund can makes tons of hay when the sun shines.]

Don’t spend that penny all at once!

Real returns turn positive by one basis point.

When Rocky was a little kid, his miserly Uncle Scrooge would hand him a shiny penny, and intone, “Don’t spend it all at once!”

The mathematically-proficient, (but economically ignorant) child would reply, “But Uncle, how do I get change back from a penny?”

After a trip to negative 0.62%, the 5-year Inflation-Index Bond (“TIP”), closed yesterday at a whopping, positive, (drum roll please): 00.01% yield!  That’s ONE BASIS POINT positive yield. Break out the champagne! Savers can now retire early! Not.

When Rocky lends money to the US Treasury, he likes to receive more money than he lends (after inflation).   He’s excited that Uncle Sam will be handing him a shiny new penny!

[Disclosure: Rocky is less bearish on Treasuries. But he’s not bullish on Treasuries. He also notes that his bond market strategy discussed in this post is working nicely at the moment.  https://onehonestman.wordpress.com/2010/11/22/less-exposure-same-return/   ]

Garbage In => Garbage Out

Back  when Rocky studied Rocket Science, a popular saying was “Garbage In = Garbage Out.” This meant that if you put silly data into a computer, the lights would flash, the drives would spin, the bells would ring, and out of the printer came: garbage.

The GIGO model came to mind when Rocky read the following e-mail from Dow Jones:
 

Dear Colleague,

The most predictive and profitable models for automated trading aren’t based on what’s
in the headlines. You need to find and leverage the little-noticed trends that really
drive the markets. 

Dow Jones Lexicon can help you uncover hidden opportunities!

Dow Jones Lexicon analyzes massive volumes of real-time news to identify the hidden trends and opportunities others may miss. Its derived-data technology gives automated traders, quantitative analysts, researchers and asset managers unbiased, quantitative news content, which they can use to expand their trading models—or customize entirely new ones.

Make better trading models with Dow Jones Lexicon:
• Analyze code words: Based on certain criteria using advanced technology.
• Identify positive or negative sentiment: Proprietary “Dictionaries.”
• Customize trading models: Use in-house dictionaries, while deploying Dow Jones Lexicon to process news content.
• Add-on to Dow Jones News & Archives: Apply to all of our archival content.

Sincerely,
Dow Jones Lexicon

 

[Disclosure: Basing one’s investment decisions on a real-time feed from  Dow Jones New Service is reminiscent of a blind man who looks in a mirror and shaves using  a straight-edge razor. As for “code words,” Rocky has only one word that really matters: “Plastics.”]

Less exposure, same return

The bottom green shows the 30yr/10yr yield curve steepness since 1980. It's a 3-sigma event.

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.”  ]