Download The Rush Report Q1 2009

The Q1 2009 Market Rush Review
By
Mark Rush
[email protected]
April 5th 2009
Copyright © 2009 by Mark A. Rush
Preface
Once again, it is once again time for my quarterly market review, where I examine world
events and attempt to understand their implications on the market. This is my time to
reflect on current events, portfolio performance, and event scenarios, and their
subsequent implication on world equity markets and my investment strategies.
As you read through this review, even if you don’t agree with my thoughts or analysis,
please take the time to think about your financial choices and ways to improve your
returns. It is my goal in life to have my money working for me instead of me working for
my money.
Please email me with your thoughts, questions, and insights on the opinions that I
present. The purpose of my effort is to stimulate a dialogue around current events and
their impact on the markets.
This document may be distributed to anyone free of charge as long as it is provided in an
unaltered form. I reserve all Intellectual Property Rights of this document.
Regards,
Mark Rush
[email protected]
Copyright © 2009 by Mark A. Rush
Please read this important notice
Disclaimers
As you read this document keep in mind that I do not have any special insights into the
markets nor do I have any type of training or experience in any kind of investments. I am
not a financial advisor nor do I have a degree in economics or finance. Remember these
facts as you read and ponder my unprofessional opinions.
This document should not be construed as investment advice; you and your financial
advisor are responsible for making your investment decisions. The purpose if this
document is for me to “think out loud” and stimulate thoughts regarding my investment
ideas for my portfolio. I am asking you for your feedback about my thoughts, strategies
and conclusions.
Nothing in this document should be construed as tax advice or estate planning. Tax laws
are complicated and change often. I do not have the time to follow changes in tax codes;
therefore, any thoughts I may have on the subject are very likely to be obsolete or, at the
very least, dated. Before you attempt to implement any tax strategies you should consult
a tax professional or financial advisor.
All thoughts and strategies are based on the fact that I invest money from the United
States using US dollars and pay US taxes. All comments and views are from my
American investment perspective. Many of my strategies consider US tax implications
and currency exchange rates that may not be valid when viewed from outside the US.
The views and opinions in this report are strictly my own based on publicly available
information. I do not have any special perspective into the markets. Opinions stated are
my own and do not reflect the opinions from any current, past or future employer.
I will/may change my strategy and investment ideas radically and suddenly between
reports without notice to any receivers of this report. My own investment strategies can
be extremely aggressive and my portfolio should not be replicated by anyone, including
me.
I am an amateur investor and this document is a hobby for me. Any thoughts and
concepts should be treated as such. Please consult a professional financial advisor before
you make any investment decisions regarding your investment ideas, goals, and
strategies. Continue reading this document at your own risk…
This report is subject to considerable error and the opinions can change without notice. Neither the information nor any opinion
expressed constitutes a solicitation to buy or sell any securities or investments. Do NOT ever purchase any security or investment
without doing your own and sufficient research.
Copyright © 2009 by Mark A. Rush
Introduction
This report is a bit shorter than my typical reports since it is that time of the year for me
to bailout the government with my annual check on April 15th.
The economy continued to shrink this past quarter and it is unlikely that anything that
government has or is going to do will change much of anything at this point. The
worldwide recession is bigger than just the United States and America alone will not be
able to fix this disaster. Our trillion dollar stimulus is not large enough to revive a 45
trillion dollar world economy when more than 30 trillion dollars of value has been
destroyed worldwide.
If you think about the economy as a star athlete who has been in a terrible traffic accident
you could visualize why a quick recovery is unrealistic. The world economy has suffered
a staggering blow and is unlikely to run a marathon in the near future. The only thing we
can do is apply triage and wait for the patient to heal. There is a point when the patient
needs to leave the ER and head to the recovery room and I believe we are now at a point
where world governments should stop intervening in the economy and let the patient
heal. The economy will eventually get better and run that marathon again but there will
be a several sleepless nights for those of us in the waiting room.
If you think about it, much of the consumption that fuelled our world economy was
unnecessary and wasteful. It seems to me most people bought new cars and houses not
because they “needed” one but because they “wanted” one. A lot of the economy was
based on producing a lot of stuff that people wanted but not necessarily needed nor
afford. Most people have enough stuff to make do for next several years. The recovery
may have to wait until things wear out and when people actually need things again.
Just like in the late 1990’s when the speculation ran rampant at the end of the day get
something for all the dot com disasters. We developed new business models, wired the
country with broadband and made our economy more efficient via the internet. I would
argue that we also sparked some dividends with this latest boom bust cycle that we
created. We sparked globalization and international trade; just as we live with the
benefits of the internet boom today the globalization benefits will continue on long after
the bust becomes a distant memory.
Regards,
-Mark
Copyright © 2009 by Mark A. Rush
Chapter 1
The Basics
How much has the government promised for the bailouts?
This “new” debt equates to over $42,000 per person in the US or $168,000 for a family of
four. The bailouts now essentially have every household in America on the hook the
value of a house without receiving any benefit (unless you recklessly borrowed or lent).
Thank goodness we a plan de jure involving borrowing and spending our way out of too
much borrowing and spending!
--- Amounts (Billions)--Limit
Current
===========================================================
Total
$12,798.14
$4,169.71
----------------------------------------------------------Federal Reserve Total
$7,765.64
$1,678.71
Primary Credit Discount
$110.74
$61.31
Secondary Credit
$0.19
$1.00
Primary dealer and others
$147.00
$20.18
ABCP Liquidity
$152.11
$6.85
AIG Credit
$60.00
$43.19
Net Portfolio CP Funding
$1,800.00
$241.31
Maiden Lane (Bear Stearns)
$29.50
$28.82
Maiden Lane II (AIG)
$22.50
$18.54
Maiden Lane III (AIG)
$30.00
$24.04
Term Securities Lending
$250.00
$88.55
Term Auction Facility
$900.00
$468.59
Securities lending overnight
$10.00
$4.41
Term Asset-Backed Loan Facility
$900.00
$4.71
Currency Swaps/Other Assets
$606.00
$377.87
MMIFF
$540.00
$0.00
GSE Debt Purchases
$600.00
$50.39
GSE Mortgage-Backed Securities $1,000.00
$236.16
Citigroup Bailout Fed Portion
$220.40
$0.00
Bank of America Bailout
$87.20
$0.00
Commitment to Buy Treasuries
$300.00
$7.50
----------------------------------------------------------FDIC Total
$2,038.50
$357.50
Public-Private Investment*
$500.00
0.00
FDIC Liquidity Guarantees
$1,400.00
$316.50
GE
$126.00
$41.00
Citigroup Bailout FDIC
$10.00
$0.00
Bank of America Bailout FDIC
$2.50
$0.00
----------------------------------------------------------Treasury Total
$2,694.00
$1,833.50
TARP
$700.00
$599.50
Tax Break for Banks
$29.00
$29.00
Stimulus Package (Bush)
$168.00
$168.00
Stimulus II (Obama)*
$787.00*
$787.00*
Treasury Exchange Stabilization
$50.00
$50.00
Student Loan Purchases
$60.00
$0.00
Support for Fannie/Freddie
$400.00
$200.00
Line of Credit for FDIC
$500.00
$0.00
----------------------------------------------------------HUD Total
$300.00
$300.00
Hope for Homeowners FHA
$300.00
$300.00
Copyright © 2009 by Mark A. Rush
2009 Stimulus II or how to spend $787 billion
Tax cuts
Total: $288 billion
Tax relief for individuals
Total: $237 billion
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$116 billion: New payroll tax credit of $400 per worker and $800 per couple in
2009 and 2010. $70 billion: Alternative minimum tax: a one year increase in
AMT floor to $70,950 for joint filers for 2009.
$15 billion: Expansion of child tax credit: A $1,000 credit to more families (even
those that do not make enough money to pay income taxes).
$14 billion: Expanded college credit to provide a $2,500 expanded tax credit for
college tuition and related expenses for 2009 and 2010. The credit is phased out
for couples making more than $160,000.
$6.6 billion: Homebuyer credit: $8,000 refundable credit for all homes bought
between 1/1/2009 and 12/1/2009 and repayment provision repealed for homes
purchased in 2009 and held more than three years. This only applies to first-time
homebuyers.
$4.7 billion: Excluding from taxation the first $2,400 a person receives in
unemployment compensation benefits in 2009.
$4.7 billion: Expanded earned income tax credit to increase the earned income tax
credit — which provides money to low income workers — for families with at
least three children.
$4.3 billion: Home energy credit to provide an expanded credit to homeowners
who make their homes more energy-efficient in 2009 and 2010. Homeowners
could recoup 30 percent of the cost up to $1,500 of numerous projects, such as
installing energy-efficient windows, doors, furnaces and air conditioners.
$1.7 billion: for deduction of sales tax from car purchases, not interest payments
phased out for incomes above $250,000.
Tax relief for companies
Total: $51 billion
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$15 billion: Allowing companies to use current losses to offset profits made in the
previous five years, instead of two, making them eligible for tax refunds.
$13 billion: to extend tax credits for renewable energy production (until 2014).
$11 billion: Government contractors: Repeal a law that takes effect in 2012,
requiring government agencies to withhold three percent of payments to
contractors to help ensure they pay their tax bills. Repealing the law would cost
$11 billion over 10 years, in part because the government could not earn interest
by holding the money throughout the year.
$7 billion: Repeal bank credit: Repeal a Treasury provision that allowed firms that
buy money-losing banks to use more of the losses as tax credits to offset the
profits of the merged banks for tax purposes. The change would increase taxes on
the merged banks by $7 billion over 10 years.
$5 billion: Bonus depreciation which extends a provision allowing businesses
buying equipment such as computers to speed up its depreciation through 2009.
Copyright © 2009 by Mark A. Rush
Healthcare
More than 11% of the total bill is allocated to help states with Medicaid
Total: $147.7 billion
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$86.6 billion for Medicaid
$24.7 billion to provide a 65 percent subsidy of health care insurance premiums
for the unemployed under the COBRA program
$19 billion for health information technology
$10 billion for health research and construction of National Institutes of Health
facilities
$1.3 billion for medical care for service members and their families (military)
$1 billion for prevention and wellness
$1 billion for the Veterans Health Administration
$2 billion for Community Health Centers
$1.1 billion to research the effectiveness of certain healthcare treatments
$500 million to train healthcare personnel
$500 million for healthcare services on Indian reservations
Education
Total: $90.9 billion
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$44.5 billion in aid to local school districts to prevent layoffs and cutbacks, with
flexibility to use the funds for school modernization and repair (State Equalization
Fund)
$15.6 billion to increase Pell Grants from $4,731 to $5,350
$13 billion for low-income public schoolchildren
$12.2 billion for IDEA special education
$2.1 billion for Head Start
$2 billion for childcare services
$650 million for educational technology
$300 million for increased teacher salaries
$250 million for states to analyze student performance
$200 million to support working college students
$70 million for the education of homeless children
Environment
Total: $7.2 billion
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$4 billion for wastewater infrastructure
$2 billion for drinking water infrastructure
$600 million for hazardous waste cleanup at Superfund sites
$300 million for reductions in emissions from diesel engines
$200 million for cleanup of leaking Underground Storage Tanks
$100 million for cleaning former industrial and commercial sites (Brownfields)
Copyright © 2009 by Mark A. Rush
Aid to low income workers, unemployed and retirees (including job training)
Total: $82.5 billion
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$40 billion to provide extended unemployment benefits through Dec. 31, and
increase them by $25 a week
$19.9 billion for the Food Stamp Program
$14.2 billion to give one-time $250 payments to Social Security recipients, people
on Supplemental Security Income, and veterans receiving disability and pensions.
$3.95 billion for job training
$3 billion in temporary welfare payments
$500 million for vocational training for the disabled
$400 million for employment services
$120 million for subsidized community service jobs for older Americans
$150 million to help refill food banks
$100 million for meals programs for seniors, such as Meals on Wheels
$100 million for free school lunch programs
Infrastructure Investment
Total: $80.9 billion
Highway construction
Total: $51.2 billion
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$27.5 billion for highway and bridge construction projects
$8 billion for intercity passenger rail projects and rail congestion grants, with
priority for high-speed rail
$6.9 billion for new equipment for public transportation projects (Federal Transit
Administration)
$6 billion for wastewater and drinking water infrastructure (Environmental
Protection Agency)
$1.3 billion for Amtrak
$100 million to help public transit agencies
$750 million for the construction of new public rail transportation systems and
other fixed guideway systems.
$750 million for the maintenance of existing public transportation systems
Investment into government facilities and vehicle fleets
Total: $29.5 billion
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$4.6 billion for the Army Corps of Engineers for environmental restoration, flood
protection, hydropower, and navigation infrastructure projects
$4.5 billion to the U.S. General Services Administration (GSA) for energy
efficiency and renewable energy.
$4.2 billion to repair and modernize Defense Department facilities.
$4 billion toward the establishment of an Office of Federal High-Performance
Green Buildings within the GSA.
Copyright © 2009 by Mark A. Rush
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$4 billion for the Clean Water State Revolving Fund (wastewater treatment
infrastructure improvements)
$4 billion for public housing improvements and energy efficiency (Department of
Housing and Urban Development (HUD).
$2 billion for the Drinking Water State Revolving Fund (drinking water
infrastructure improvements)
$890 million to improve housing for service members
$300 million to acquire electric vehicles for the federal vehicle fleet
$250 million to improve Job Corps training facilities
$240 million for new child development centers
$150 million for the construction of state extended-care facilities
$100 million to improve facilities of the National Guard
$240 million for the maintenance of United States Coast Guard facilities
Supplemental investments
Total: $15 billion
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$7.2 billion for complete broadband and wireless Internet access
$1.5 billion for competitive grants to state and local governments for
transportation investments
$1.38 billion for rural drinking water and waste disposal projects
$1 billion to the Bureau of Reclamation for drinking water projects for rural or
drought-likely areas
$750 million to the National Park Service
$650 million to the Forest Service
$515 million for wildfire prevention projects
$500 million for Bureau of Indian Affairs infrastructure projects
$340 million to the Natural Resources Conservation Service for watershed
infrastructure projects
$320 million to the Bureau of Land Management
$280 million for National Wildlife Refuges
$280 million for the National Fish Hatchery System
$220 million to the International Boundary and Water Commission to repair flood
control systems along the Rio Grande
$220 million for other public lands management agencies
$500 million to update the computer center at the Social Security Administration
$290 million to upgrade IT platforms at the State Department
$50 million for IT improvements at the Farm Service Agency
Copyright © 2009 by Mark A. Rush
Energy
Loans and investments into green energy technology is a significant part of the final bill
Total: $61.3 billion
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$11 billion funding for an electric smart grid
$6.3 billion for state and local governments to make investments in energy
efficiency
$6 billion for renewable energy and electric transmission technologies loan
guarantees
$6 billion for the cleanup of radioactive waste (mostly nuclear power plant sites)
$5 billion for weatherizing modest-income homes
$4.5 billion for the Office of Electricity and Energy Reliability to modernize the
nation's electrical grid and smart grid.
$4.5 billion for state and local governments to increase energy efficiency in
federal buildings
$3.4 billion for carbon capture experiments
$3.25 billion for the Western Area Power Administration for power transmission
system upgrades.
$2.5 billion for energy efficiency research
$2 billion for manufacturing of advanced car battery (traction) systems and
components.
$3.2 billion toward Energy Efficiency and Conservation Block Grants. [32]
$500 million for training of green-collar workers (by the Department of Labor)
$400 million for electric vehicle technologies
$300 million for federal vehicle fleets, to cover the cost of acquiring electric
vehicles, including plug-in hybrid vehicles.
$300 million to buy energy efficient appliances
$300 million for reducing diesel fuel emissions
$300 million for state and local governments to purchase energy efficient vehicles
$250 million to increase energy efficiency in low-income housing
$600 million to cleanup hazardous waste that threaten health and the environment
$200 million to cleanup petroleum leaks from underground storage tanks
$100 million to evaluate and cleanup brownfield land
$400 million for the Geothermal Technologies Program
Housing
Total: $12.7 billion
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$4 billion to the Department of Housing and Urban Development (HUD) for
repairing and modernizing public housing, including increasing the energy
efficiency of units.
$2.25 billion in tax credits for financing low-income housing construction
$2 billion for Section 8 housing rental assistance
$2 billion to help communities purchase and repair foreclosed housing
$1.5 billion for rental assistance and housing relocation
$510 million for the rehabilitation of Native American housing
$200 million for helping rural Americans buy homes
$130 million for rural community facilities
$100 million to help remove lead paint from public housing
Copyright © 2009 by Mark A. Rush
Scientific research
NASA is among the research centers receiving additional funds under the Act
Total: $8.9 billion
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$3 billion to the National Science Foundation
$2 billion to the United States Department of Energy
$1.3 billion for university research facilities
$1 billion to NASA
$600 million to the National Oceanic and Atmospheric Administration (NOAA)
$580 million to the National Institute of Standards and Technology
$230 million for NOAA operations, research and facilities
$140 million to the United States Geological Survey
Other
Total: $18.1 billion
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$8.8 billion: State Block Grants: in aid to states to defray budget cuts.
$4 billion for state and local law enforcement agencies
$1.1 billion for improving airport security
$1 billion in preparation for the 2010 census
$720 million for improving security at the border and ports of entry
$750 million for DTV conversion coupons and DTV transition education
$210 million to build and upgrade fire stations
$150 million for the security of transit systems
$250 million for the security of ports
$26 million to improve security systems at the Department of Agriculture
headquarters
$150 million for an increase of claims processing military staff
$150 million for VA general operating expenses
$50 million for the National Endowment for the Arts to support artists
$50 million for the National Cemetery Administration
And to think this was only 6% of the total bailout/stimulus money. Your share for this
6% is only $2,500 ($10,000 for a family of four).
Copyright © 2009 by Mark A. Rush
Chapter 2
Market Dynamics
Economic Projections
It is time to review world events applying my “opinion” to the probability of the event
occurring (0-100%) with my “opinion” of the market impact on a scale from 1 to 10. A
“1” represents little to no impact on the markets; whereas, a “10” indicates that if the
event occurs, I expect a widespread fundamental market directional change to occur.
This is totally unscientific, based on my irrelevant opinions with absolutely no other basis
other than my limited understanding of how the world works.
The purpose of this section is to highlight current risks in the market. I will attempt to
quickly try to explain my thought process behind each rating.
US Economic Indicators (my view)
US Gross National Product (GDP) Shrinks > 3% for 2009
Probability of Occurrence 50%
Impact
7
The Economy has been falling over at a 6% annual rate during the past few months. I
don’t believe that this rate will continue and we should begin to stabilize possibly in the
next few months. I am starting to see signs of the economy stabilizing but this is not to
be confused with recovering.
The housing wealth effect has been eliminated and will dampen future consumption for
many Americans for the foreseeable future. To add to the problem, we also have an
economic slowdown in the third world, the world economy will continue to slow and this
will dampen economic recovery in the US.
On the bright side I believe the Chinese are taking positive steps to rebuild their economy
by building infrastructure (instead of attempted stimulus via social programs) and
lowering taxes across the board. I find it funny in a capitalist country like the US we are
mostly using a socialist approach to revive our economy while at the same time the
communist Chinese are taking more of a Regan approach to reviving their economy.
Historically economic realism has always outperformed socioeconomic idealism, the
Chinese economy will recover faster because of this and therefore a significant portion of
my money is invested in that country.
I believe the economy will continue to contract but most likely a depression has been
adverted. The decline in US GDP should slow down for the remaining year but the
economy is unlikely to recover any time soon.
The economy is weakening but at a slower rate
Copyright © 2009 by Mark A. Rush
Unemployment of peak >10% by the end of 2009
Probability of Occurrence 50%
Impact
7
We are currently at 8.5% while most economists were calling for 8-9% peak
unemployment this year. I am sticking with 10% based on my estimates. I find this
number very troubling but I hope unemployment has more or less peaked this year… My
current prediction is certainly much higher than what I was expecting six months ago. If
employment stays here or improves (back under 8% unemployment), I believe this will
be the sign that the economic is improving.
I believe unemployment will peak this year at recent historical levels and we will start to
reduce unemployment in the future but for now this indicator is a big negative…
Unemployment is high and is continuing to trend higher
Copyright © 2009 by Mark A. Rush
Federal Reserve raises interest rates 2009
Probability of Occurrence 90% for ‘09
Impact
6
Let’s see… Since the Fed funds rate is effectively zero… Therefore prediction of rate
going up from zero is quite bold. Current low short term rates are very inflationary but I
feel that it a necessary evil at this point. Longer term I expect these low rates will cause
inflation, which is bad for the value of the US dollar. Hopefully the Fed will start being
concerned about inflation at the end of next year therefore the Fed will raise rates in late
2009 or 2010.
I find it odd that we created a crisis by having rates too low (near 1%) for too long and
we are going to cure our problem by having rates at 0%.
Low rates are good for the market…
Inflation < -2% in 2009
Probability of Occurrence 50%
Impact
7
I have been expecting severe deflation but so far I have been wrong. The current
inflation rate is around +0.4%. I believe the main reason that we haven’t seen massive
deflation is due to the vast amount of money the Federal Reserve has printed. Below is a
chart of the total money supply. This is how the Fed is fighting deflation, in the past 9
months FTTM has jumped from $4 Trillion to $8 Trillion. The Fed has also released a
plan of Quantitative Easing policy (printing money). Long term this is inflationary at
best and hyperinflation or currency collapse at worst.
Copyright © 2009 by Mark A. Rush
Currently we are not experiencing inflation or deflation but the increase money supply is
worrisome
Return of spending by US consumer in 2009
Probability of Occurrence 10%
Impact
7
Clearly the housing ATM machine is broken and many people lost their house so they
could fill it with more junk. Foreclosures will be higher than historical for the next 2-5
years; consumer spending will take years to recover since much of the spending was
financed via fictitious housing values.
This indicator is very weak but may be stabilizing
S&P profits exceed of $40/share in 2009
Probability of Occurrence 50%
Impact
6
I expect that corporate profits will fall until sometime in 2010. Corporations are
financially stronger going into this down turn (except financial institutions) compared to
other downturns but this one will be much deeper.
I expect S&P 500 earnings growth to be down by more 33% form last year
Copyright © 2009 by Mark A. Rush
Real Estate prices drop greater than 10% in 2009
Probability of Occurrence 50%
Impact
3
2008’s year over year drop in real estate prices in the top 20 cities was 19% while my
prediction for 2008 was only 5-10%. Cleary I was too optimistic last year.
On a brighter note the 30 year mortgage rate is down to 4.8%, and in the scheme of things
makes borrowing very attractive. Currently, I don’t own a house and but I have started to
shop for a cabin in northern Virginia/West Virginia and I expect to buy a place within the
next 9 months. I expect housing prices to stabilize in 2010, not because of intrinsic
value, but due to the new tax and spending scheme in place, higher inflation, and voter
bias to have the tax base subsidize home ownership. I believe that real estate is a
reasonable safe haven for capital, only if you can borrow the money at a tax subsidized
fixed rate.
The attractiveness of me owning a house isn’t the because of the house but it is the
acquisition of the loan. I want to borrow money now and have never “wanted” to borrow
money before in my life. I am going to borrow within my means, make a 20% down
payment and keep some money free to make payments if I loose my job. I want to own
physical things (houses) and want to owe paper (dollars).
30 Year Mortgage Rates
Housing prices are falling; interest rates are falling
Copyright © 2009 by Mark A. Rush
$2,000,000,000,000.00 (Trillion Dollars) budget deficit for FY 2009
(Sadly raised from 1,000,000,000,000.00 from the Q4 ’08 report)
Probability of Occurrence 70%
Impact
4 short term: 9 long term
The rich are getting decimated and as they loose their jobs and/or income, their bonds and
stocks have lost value and many won’t be paying taxes. For those of you who think that
the “rich” in the country don’t pay most of the taxes the proof will be watching the tax
revenues. The current budget wrongly predicts $2.7 trillion in revenues and that equates
to $9,000 in taxes for each and every person in the US or $36,000/year for a family of
four. Are you paying your share? Are you neighbors?
I thought “W” was a spending fool but apparently he was a rank amateur. The
Democrats have a propensity for uninhibited spending and with control of the White
House and Congress they have very little to stand in their way. The party of big social
programs (spending) has the biggest excuse to “invest” since the great depression.
Congress is of the opinion that we need to bail anyone and everyone out. The problem is
they only want to bail out failure and not success. Where is my reward for not buying a
house? If I would have overspent I would be eligible for a reworking of my loan… since
I didn’t what do I get? I get to pay more taxes…
Government should pay down its debts and fix infrastructure when times are good and
borrow when times are bad. Someday we will hit a point of “we can’t afford to do this”
only when it is too late. I would rather send money out to the population in the form of
checks to allow them to buy the things that are needed, not in the form of political
patronage.
“Government’s view of the economy could be summed up in a few short phrases: If it
moves, tax it. If it keeps moving, regulate it. And if it stops moving subsidize it.”
-Ronald Reagan
2010 Proposed Budget
Total expected receipts
Estimated receipts for fiscal year 2010 are $2.381 trillion, an increase of 8.9%.








$1.061 trillion - Individual income taxes
$940 billion - Social Security and other payroll tax
$222 billion - Corporation income taxes
$77 billion - Excise taxes
$23 billion - Customs duties
$20 billion - Estate and gift taxes
$22 billion - Deposits of earnings
$16 billion - Other
Copyright © 2009 by Mark A. Rush
Total spending
President Obama's budget for 2010 totals $3.55 trillion in spending. Percentages in
parentheses indicate percentage change compared to 2009.
Mandatory spending: $2.184 trillion
o
o
o
o
o
o

$695 billion (+4.9%) - Social Security
$453 billion (+6.6%) - Medicare
$290 billion (+12.0%) - Medicaid
$11 billion (+275%) - Potential disaster costs
$571 billion (-15.2%) - Other mandatory programs
$164 billion (+18.0%) - Interest on National Debt
Discretionary spending: $1.368 trillion (+7.0%)
o $663.7 billion (+12.7%) - Department of Defense (including Overseas
Contingency Operations)
o $78.7 billion (-1.7%) - Department of Health and Human Services
o $72.5 billion (+2.8%) - Department of Transportation
o $52.5 billion (+10.3%) - Department of Veterans Affairs
o $51.7 billion (+40.9%) - Department of State and Other International
Programs
o $47.5 billion (+18.5%) - Department of Housing and Urban Development
o $46.7 billion (+12.8%) - Department of Education
o $42.7 billion (+1.2%) - Department of Homeland Security
o $26.3 billion (-0.4%) - Department of Energy
o $26.0 billion (+8.8%) - Department of Agriculture
o $23.9 billion (-6.3%) - Department of Justice
o $18.7 billion (+5.1%) - National Aeronautics and Space Administration
o $13.8 billion (+48.4%) - Department of Commerce
o $13.3 billion (+4.7%) - Department of Labor
o $13.3 billion (+4.7%) - Department of the Treasury
o $12.0 billion (+6.2%) - Department of the Interior
o $10.5 billion (+34.6%) - Environmental Protection Agency
o $9.7 billion (+10.2%) - Social Security Administration
o $7.0 billion (+1.4%) - National Science Foundation
o $5.1 billion (-3.8%) - Corps of Engineers
o $5.0 billion (+100%) - National Infrastructure Bank
o $1.1 billion (+22.2%) - Corporation for National and Community Service
o $0.7 billion (0.0%) - Small Business Administration
o $0.6 billion (-14.3%) - General Services Administration
o $19.8 billion (+3.7%) - Other Agencies
o $105 billion - Other
I have included an interesting video this time, different country universal theme.
http://www.youtube.com/watch?v=94lW6Y4tBXs
I believe thoughtless government overspending is harmful in the long run
Copyright © 2009 by Mark A. Rush
International value of the US dollar declining >20% in next 5 years
Probability of Occurrence 75%
Impact
7
Long-term, I don’t believe the US can continue to support the current public and private
debt burden. In the long term the dollar has no direction to go but down. The
combination of poor education, poor fiscal discipline (public and private), and mass
retirement only leads me to believe over the next 20 years it would be better to place a
significant portion of your investments overseas to obtain better growth and to take
advantage of the eventual currency devaluation and fall in local purchasing power.
I have been using the Euro to show the relative strength or weakness of the dollar but
with the current economic crisis I have decided to switch to a basket of currencies using
the UUP that is an ETF that has a basket of currencies comprised of Euro, Japanese Yen,
British Pound, Canadian Dollar, Swedish Krona and Swiss Franc
From the chart below you can see before the crisis that the dollar was falling and once the
crisis come to fruition the dollar rose. The dollar should eventually fall 10-20% to get
back to the old values/trend. Oil and Gold would theoretically increase by 10-20% under
these conditions.
Long term bad for US investing; Good for Foreign investments and commodities
Copyright © 2009 by Mark A. Rush
Improved Liquidity in 2009
Probability of Occurrence 75%
Impact
7
I started to talk about liquidity over a year ago and I have been pointing out the
importance of this indicator. Liquidity became almost nonexistent for a few days a
couple of in the past few months and the lack of liquidity could have caused a worldwide
credit collapse… I still believe that the private credit market is and it will remain
materially weaker for some time, although it should begin to improve with time.
The below chart shows the TED (Treasury Euro-Dollar) spread. This shows the premium
that banks must pay over Treasuries to get money. This is kind of like a fear index for the
credit market.
This indicator is weak but has improved significantly although isn’t anywhere near
normal
Copyright © 2009 by Mark A. Rush
Technical Indicators
Current values N/A
Impact N/A
Model Portfolio and other technical indicators (+100% strong buy -100% strong sell)
US Stock
SPY
QQQQ
IWM
12/31/08 4/3/09
0%
32%
-24%
96%
0%
40%
Foreign Stocks
EFA
32%
EEM
0%
Bonds
TLT
SHY
72%
+16%
40%
80%
-48%
-40%
Gold/Euro/Yen/US Dollar
GLD
+80%
-48%
FXE
+32% +64%
FXY
+56% -96%
UUP
-32% -48%
Volatility
VIX
-64%
-80%
http://quotes.barchart.com/texpert.asp?sym=SPY&what=opinion
http://quotes.barchart.com/texpert.asp?sym=qqqq&what=opinion
http://quotes.barchart.com/texpert.asp?sym=IWM&what=opinion
http://quotes.barchart.com/texpert.asp?sym=EFA&what=opinion
http://quotes.barchart.com/texpert.asp?sym=EEM&what=opinion
http://quotes.barchart.com/texpert.asp?sym=tlt&what=opinion
http://quotes.barchart.com/texpert.asp?sym=SHY&what=opinion
http://quote.barchart.com/texpert.asp?sym=gld&code=BSTK
http://quote.barchart.com/texpert.asp?sym=FXE&code=BSTK
http://quote.barchart.com/texpert.asp?sym=FXy&code=BSTK
http://quote.barchart.com/texpert.asp?sym=uup&code=BSTK
http://quotes.barchart.com/texpert.asp?sym=%24VIX&what=opinion
Copyright © 2009 by Mark A. Rush
We have talked about the Volatility index (VIX) before as the stock market fear index
and once again you should notice that it spiked after 9/11 and during the start of the Iraq
war. It was just under 40 in the last report and closed out the year at 40. Last quarter as
the VIX approached 40 going up I considered that a very ominous sign but since then it
has hit 90 and has again approached 40. This time 40 looks like a positive for the market
at least in the short term since volatility is falling.
Bottom line is that these indicators are positive for risk taking and negative for risk
aversion.
These indicators have reversed positive for all stocks, negative for Government bonds
(safe haven), positive for Euro, negative for Gold, Dollar and Yen (safe haven). This
indictor is Bullish.
Copyright © 2009 by Mark A. Rush
Chapter 3
The Plan
Every trader reserves the right to make a more intelligent decision today than he made
yesterday.
- Sheldon Natenberg
Housing Market
I have been pointing out the up coming housing bear market since 2006; I think I have
beat this to death and everyone now gets it.
The three “acts” of the housing bear market are:
Act I: Build and they will come! 2003-2006
Act II: I have to repay this loan? 2006-2008
Act III: Banks liquidate and crush housing prices… 2008-2010
I still want to make it clear that I don’t think housing “real” values will go up any time
soon only gain modestly for the next 5-10 years after bottoming. I do want to buy a
house but it’s not because I think houses are going up but because I can borrow
subsidized money cheaply (tax deductions)… I believe mortgage rates eventually are
going to go up to 8%-10% over the next 3-5 years and I want to get a subsidized loan
before those rates go up. Also I believe that longer term we are going to experience
serious inflation and owning a house (or gold) is a good hedge when combined with a
large fixed price loan. Houses are not an investment they are places to live.
This play is far from over but the remaining performance will be anticlimactic. Even
though this has been a staple of this report for years this section will start to fade away.
Did we hit bottom?
Probably not… but maybe?
I believe we may be approaching a crossroads in the stock market at this point and it is
very hard to predict what will come next. The market may improve or it may get worst
but the most likely outcome is we may just bounce around here for the next several
months and possibly years.
So the question is with the market showing recovery in the past few weeks is this the time
to invest? That is the dilemma with being at a crossroad is that things are getting difficult
to predict. We have two very large forces at work here the implosion of the economy
causing deflation and central bank printing presses causing inflation. The outcome is
uncertain and anyone who believes otherwise is foolish.
Copyright © 2009 by Mark A. Rush
On the positive side the economy isn’t falling off a cliff and mass bankruptcies of large
corporations aren’t occurring (except in Autos). I believe the economy will stop
imploding over the next 3-9 months. Stock market recoveries usually occur 6 months
prior to the beginning of the recovery. In other words, it doesn’t look like a complete
collapse of the economy is going to occur but the risks are still very high.
On the negative side we still have substantial risks in the economy, what worries me it
the prospect of thousands of little companies that aren’t “too big to fail” going under.
After all, small business provide most of the jobs in the US and who is watching the little
guy and offering loan guarantees if things go bad. Also overseas a vigilant eye is needed
to watch over the UK, Ireland, Italy, and several Eastern European countries. Some of
these countries are teetering and if the “experts” were concerned about AIG failing what
would they think if the UK went Bankrupt?
The government keeps distorting the market with all the bailouts and programs. What the
economy needs is some certainty and changing the rules every few days isn’t good for
market certainty. What was needed to be done has been done and we are now at the point
that we need to sit back and let things mend themselves. In my opinion, if the members
of the US Congress were to take a introductory economics class they would fail it yet
they are the ones writing the rules for a $13 trillion economy. It’s like taking someone
who has never seen an airplane before and making them chief designer at Boeing. The
government needs to stop helping because it is not helping anymore…
I have gotten a little less pessimistic not because things have gotten better but they
haven’t continued to collapse. I still have a market bottom target of around 550 – 600 on
the S&P 500 and this number is based on historical price/earnings multiples and previous
bear market bottoms. I am only partially invested mostly long China, Australia and oil
while being short the S&P 500 and the US Dollar and Yen. I expect to become a long
term investor later in the year possible late Summer or Fall (or S&P 500 under 600).
Where do we go from here?
I wish I knew but I don’t. Based on what I have read and can think of, I have laid out
some possible economic outcomes…








Quick recover
Quick and mild recession
Deep and long recession
Depression with deflation
High inflation
Hyperinflation
Monetary system collapse
“X”
Copyright © 2009 by Mark A. Rush
Based on my limited understanding of the world I personally believe without any
justification whatsoever that the probability of each scenario is as such.
Quick recovery
Recession
Long Recession
Depression
High inflation
Hyperinflation
Collapse
X
12/31/08
10%
20%
30%
10%
15%
5%
2.5%
7.5%
4/3/09
5%
30%
30%
5%
15%
5%
1%
9%
So more or less I suspect a 5% chance of a rapid return to economic growth, 60% chance
of recession, 5% chance of a Depression, 20% chance of inflation and 10% of currency
collapse or something else just as bad but yet to be determined.
How I theoretically invest under these circumstances
Based on the above probabilities I should have some aggressive stocks, value stocks,
various bonds, cash, and a sprinkling of gold coins and other useful things. Talk about a
diversified portfolio…
5% chance for a return to normal; investments should be made in aggressive stocks
60% chance for recession; High yield highly rated corporate bonds
5% chance for depression; Cash
20% chance for inflation; Gold and other commodities or short treasuries and short dollar
10% chance of some sort of collapse; gold coins and other useful material objects
Theoretically if I had $10,000 to invest, based on this section I should own…
$500 in aggressive stocks
$6,000 in high yield safe corporate bonds
$500 in cash
$2,000 in gold and oil stocks or short US treasuries via owning the TBT fund
$1,000 in useful physical objects in my home
Deflation
It seems to me that we were in a period of potential deflation but that possibility is fading
fast as the Federal Reserve and Treasury has provided trillions of dollars of liquidity by
lending and printing money. The Fed and other central banks have printed so much
money that the risk of deflation is fading fast… I am was happy to sit in cash for the long
haul but monetary policy has scared me into action for fear of loosing my remaining
saving via falling dollar and/or hyperinflation.
Copyright © 2009 by Mark A. Rush
Economy
The economy is weak and is likely to remain weak through 2010, at the end of 2010 the
Bush tax cuts expire and a large tax increase will be levied on the productive aspects of
our economy staring in 2011. Currently a carbon tax is being proposed and implemented
in 2012 that will tax everyone. So about the time the economy should recover we will tax
significantly increase taxes on capital and production then the following year we will
have a universally tax on consumption. It will take about 3 years to digest those tax
increase so I don’t expect the US economy to return to 3% GDP growth until 2015.
China and Europe will recover before the US this time.
The Dollar and US Bonds (the next bubble to burst)
I can’t emphasize this enough… Long term; I hate US government bonds… and by long
term I say over the next 3-20 years. Short term they may have value but have been bid up
to ridiculous values. The thirty year treasury is still relativity high yield of 3.6%. Would
you be willing to loan money to the US (or anyone) for the next 30 years at a locked in
rate of 3.6%???? If you are let me know because I am willing to pay 4.0%. This is why I
am I buying a house.
The only reason that the dollar is where it is now is because of a flight to some sort of
“perceived” safety. Longer term, more rational minds are going to see that the value of
the US Dollar is at risk and the resources of the US Government are not unlimited.
Currently the US is at the highest risk for default since WWII.
I will not buy nor shall I ever hold US Treasuries Bonds (except for TIPS). If anything I
will short them when the time comes (via TBT). Yields are far too low for the risk being
taken, the flight to “quality” has artificially driven rates low (bond prices high) and they
will fall. The Federal Reserve will need to eventually raise rates and this will also cause
bonds to fall. I fully expect that tax revenues will fall greatly this year. Add to this the
looming Social Security issue and likely inflation.
In the near term it is anyone’s guess how bonds will do. One observation regarding the
market is that things tend to go on longer than anyone thinks. In other words I think
bonds are overvalued and yields are too low but I thought that about housing before it ran
up another 30%. In the short run if deflation continues to be in the driver’s seat and
people are not willing to divest of bonds, then bonds will perform. If you look at my
Model portfolio you will see that bonds outperformed the market last year substantially.
If the chart on the next page doesn’t scare you then nothing will, and to make things
better the source of this data is our U.S. Government Accountability Office.
Copyright © 2009 by Mark A. Rush
Muni bonds
Fundamentally, the housing market has given many cities, counties, states artificially
high revenue streams due to property taxes and yet they felt the need to borrow more
money backed by those heightened revenue streams. Well, as the housing market
collapses and property taxes recede, many of these municipalities are or going to have
trouble paying the interest on those bonds let alone returning the principle to their rightful
owners. Based on this situation I will avoid many municipal bonds.
But what do I think of bonds as an investment? What is abundantly clear is that the US
Government isn’t going to let anyone fail, especially any state or local government. In
fact I believe they may even encourage these entities to “simulate” the economy (this is
merely a political code word for tax and spend without the tax part). I think that Muni
bonds are safe as long as Treasuries are safe. If a true dollar crisis were to develop this
issue would become disastrous. As a Capitalist, I hate these instruments; as a reluctant
Keynesian, how could you not love them?
The question isn’t will or will they not pay the loans back; the question is who will pay
the loans back? If you don’t believe the previous section on US Bonds then this is the
place to go… If you do then these are a time bomb. If the Federal government steps as I
expect these bonds would be safe and have higher yields and better tax advantages than
treasuries.
Copyright © 2009 by Mark A. Rush
Corporate Bonds/convertible bonds/preferred shares
As I have stated in previous sections I don’t like US Bonds because I believe they are too
expensive and the yield is too low. What I do like is highly rated corporate bonds
especially the ones being back by the government. The yields on these bonds beat US
bonds and in terms of risk adjusted yields are high. I am parking some of my excess
money here.
I have also bought some funds that deal with convertible and preferred share. These are
great little instruments that have high yields and substantially less risk than common
shares. When inflation starts to appear, I would sell all these instruments quickly for
bonds do horribly during inflationary time. Something one could consider is buy
corporate bonds and selling (shorting) Treasuries. This would offer some protection from
inflation and likely to yield a decent return under most circumstances.
Financial stocks
Right, most of these entities are virtually bankrupt. I trade them but owning them for the
long haul isn’t a good idea since hope is not a legitimate investment strategy. As banks
give back Tarp money and you get the government off their back, they may become a
good investment.
Gold
This is another tough one that is very hard to call. No one knows if or how long we’ll be
in a deflationary cycle and no one knows if or when an inflationary cycle will start. Once
an inflationary cycle starts gold would be a good investment but for now I plan to stay
away form in as an investment theme.
I bought a small volume of physical gold and I have it in a safety deposit box just as a
insurance. I am able buy physical gold and put it into a safety deposit box even when I
think is going down by also selling short financial gold (GLD) via the stock market. This
called a physical/financial spread and it allows you to own gold without worrying about
the value of the stuff you own. This will open you up to all kinds of issues regarding
taxes and margining… This is a nice way to own gold without have much exposure to
actual gold prices.
Oil/Energy
Oil has been remarkably resilient. The funny part is that investment has fallen in new
fields and if the economy ever recovered then oil would double fairly easy from current
prices. Oil was high due to impending demand of the world economy, drilling has fallen
and are likely to have severe shortages of oil in the next 2-5 years.
Oil stock may be a good place to put a little money in this summer. If the dollar weakens
and/or inflation takes hold these stocks will outperform. I own shares of BP for its high
yield.
Copyright © 2009 by Mark A. Rush
Domestic Stocks
As long as we are in the deflationary part of this crisis stocks will continue to go down no
matter how “cheap” they get. Deflation is bad for stocks, inflation is bad for stocks (but
not as bad), and a crap economy is really bad for stocks. I said that I will invest again at
DJIA 5500… Stock did get cheap and I started buying at around DJIA 7000 and lower.
Stocks are cheap and most likely going to get cheaper this summer!
Summary of Mark(et) US Economic Indicators
GDP Growth – Negative
Unemployment – Very High and increasing
Federal Reserve Bias – Printing Money
Inflation – Neutral
Consumer Spending – Down but stabilizing
Corporate profits Growth Rate – Falling
Real Estate Market – Collapse
Budget Deficit – Excessive
Dollar – Weakening
Volatility Index – High but improving
Technical Indicators – Positive stock, negative bonds and reserve currencies/gold
Liquidity – Poor but improving
So… What is the Plan?
I made the statement to sell everything by 1/20/09 and believe I got that one right but I
thought the market sold off too fast and I started to buy stock heavily around DJIA 7000.
I have made some of my money back that I had lost and have no intentions of loosing it
again so I sold stocks a week before this report went out. We may hit DJIA of 9000 and I
am effectively out of the market again and as we fall I will become short of the stock
market once again. The problem with investors is they tend to be too optimistic, the
current crisis is far from over and employment and the economy are still very week. I
believe that it is still way too early to start investing heavily. The trick to this game is too
have lots of money ready when the coast is clear and everyone else has lost interest in
buying things.
Do I think that we may hit 5500? Its possible but becoming more unlikely. The Fed
action scared me out of cash (I was happy as a clam in cash until the Fed said they were
going implement another trillion dollars of quantitative easing). The government is going
to error deliberately on the side of inflation to prevent inflation. I expect the bottom of
the stock market to occur this summer or fall.
Copyright © 2009 by Mark A. Rush
This is a chart of the S&P 500 since 1995 and I have drawn two red lines on this chart. I
believe that it may be a long time before we break the upper red line but I am impressed
on how well the market has behaved around the 800 level. It is possible that we my just
meander for months or year just above that 800 on the S&P as long as nothing else bad
happens. If something else bad happens (the “X” factor) then this level may hold until
the economy recovers. But be forewarned that if this level doesn’t hold we will surly be
on our way to 5500 on the DJIA.
Longer term globalization has not and will not go away for the next 30 years. But the US
has demonstrated its dependency on credit and if we add in the fact that we have a
growing social security time bomb, it still brings me back to the same theme that I have
had since the first issue of this report. With my long term view on global
macroeconomics and my view of the US macroeconomics of the US debt markets, I have
no choice but to invest outside of the US, minimizing my exposure to the US dollar and
especially avoiding dollar denominated government bonds in the long run… I missed out
of the explosive growth in China the first time; I won’t miss out a second.
So where does that take us? Deflation, inflation, it might go up it might stay here, it may
drop? Well, we are at the crossroads for the next 6 months and nothing is certain even
holding cash…
The next few months are going to be an extremely difficult investment environment. We
are likely to go through several phases of boom, bust, deflation, inflation, bailouts and
claw backs. One thing that’s for sure is that passive investing is a fool’s game now.
Putting money in an investment and letting it sit unwatched for the next few years will
only result in tears. Only strategies, action plans, and contingency plans will get me
through this period.
Copyright © 2009 by Mark A. Rush
Chapter 4
Domestic watch list for 2009
These instruments are cheap because any investments are risky at this time in our
economic history, something to think about.
iShares Dow Jones Select Dividend Index
Symbol
Sector
Risk
Return
Complexity
Time Horizon
Tax implications
Account(s)
DVY
Dividend paying stocks ETF
moderate
moderate
simple
Unknown
Consult tax advisor (mostly at 15%)
Taxed and IRA
This is a diversified ETF with higher yielding large company stock with a current
indicative yield just under 8% (assuming no more dividend cuts)
iShares S&P U.S. Preferred Stock Index
Symbol
PFF
Sector
Preferred shares ETF
Risk
Moderate
Return
High
Complexity
Simple
Time Horizon
Unknown
Tax implications
Consult tax advisor (not sure)
Account(s)
Taxed and IRA
This is a diversified ETF with higher yielding large company preferred stock with a
indicative yield over 14% (assuming no dividend cuts)
PowerShares Financial Preferred (PGF)
Symbol
Sector
Risk
Return
Complexity
Time Horizon
Tax implications
Account(s)
PGF
Financial Company preferred shares ETF
Higher
Very High
Simple
Unknown
Consult tax advisor (not sure)
Taxed and IRA
This is a diversified ETF with higher yielding large financial company preferred stock
with a current indicative yield near 19% (assuming no dividend cuts)
Copyright © 2009 by Mark A. Rush
iShares iBoxx $ High Yield Corporate Debt
Symbol
Sector
Risk
Return
Complexity
Time Horizon
Tax implications
Account(s)
HYG
Corporate bond ETF
lower
Very high
simple
Unknown
Consult tax advisor (Normal tax rate)
IRA and Taxed
This is a diversified ETF with higher yielding large company bonds with a current yield
near 11% (assuming no dividend cuts)
SPDR Lehman High Yield Bond (JNK)
Symbol
Sector
Risk
Return
Complexity
Time Horizon
Tax implications
Account(s)
JNK
Corporate junk bond ETF
Very High
Very High
Simple
Unknown
Consult tax advisor (normal tax rates)
IRA and Taxed
This is a diversified ETF with higher yielding large company junk bonds (non investment
grade) with a current yield near 14% (assuming no dividend cuts)
iShares FTSE NAREIT Mortgage REITs (REM)
Symbol
Sector
Risk
Return
Complexity
Time Horizon
Tax implications
Account(s)
REM
Mortgage REITs ETF
Extraordinary
Extraordinary
Simple
Unknown
Consult tax advisor (normal tax rate)
IRA and Taxed
This is a diversified ETF with exposure to mortgages with a current yield near 27%
(assuming no dividend cuts). If you want exposure to the mortgage mess, here it is. This
security is VERY speculative.
Copyright © 2009 by Mark A. Rush
Gold
Symbol
Sector
Risk
Return
Complexity
Time Horizon
Tax implications
Account(s)
GLD
Precious Metal
Moderate +
Moderate
Simple
Medium term (3 months – 60 months)
Long term capital gain rate of 15% does not apply to this ETF.
Long term capital gains rate for this security is 28%
IRA and Taxed
What this ETF does is allows you to buy gold as if were a stock. Each share that you
hold is equivalent to owning a 1/10th of an ounce of gold. The gold is stored in a bank
vault in Great Britain. Gold has always been a currency of safety and I believe world
demand for this metal is only going to go up as the world gets richer. Also as the US
dollar falls gold will tend to go up and vise versa.
UltraShort Lehman 20+ Trsy ProShares
Symbol
TBT
Sector
2x leveraged short US long Bond EFT
Risk
Speculative
Return
high
Complexity
Simple
Time Horizon
Unknown
Tax implications
Consult tax advisor (normal)
Account(s)
IRA and Taxed
The investment seeks daily investment results, before fees and expenses, which
correspond to twice the inverse of the daily performance of the Lehman Brothers 20+
Year U.S. Treasury index. This is what I will use when I decide that I want to short the
long bond. This ETF moves opposite direction and twice as fast as the 20-30 year bonds.
iShares Lehman TIPS Bond
Symbol
TIP
Sector
Treasury Inflation Protected bond ETF
Risk
Lower
Return
Moderate
Complexity
Simple
Time Horizon
Unknown
Tax implications
Consult tax advisor (normal)
Account(s)
IRA and Taxed
The investment seeks results that correspond generally to the price and yield performance
of the inflation-protected sector of the United States Treasury market as defined by the
Lehman Brothers U.S. TIPS index
Copyright © 2009 by Mark A. Rush
Chapter 5
International watch list 2009
2009 Consensuses GDP Growth Forecast by Country
China
India
Russia
Egypt
Malaysia
Indonesia
Poland
Pakistan
8.5%
6.8%
6.8%
6.7%
5.6%
5.5%
4.3%
4.2%
Thailand
Singapore
Argentina
Taiwan
Brazil
South Africa
South Korea
Chile
3.9%
3.8%
3.5%
3.4%
3.4%
3.3%
3.3%
3.3%
Turkey
Israel
Venezuela
Mexico
Australia
Hong Kong
Canada
Sweden
3.2%
2.8%
2.7%
2.5%
2.3%
2.1%
1.4%
1.0%
France
United States
Germany
Japan
European Union
Spain
Italy
United Kingdom
Notice that the United States and Europe lag behind the rest of the world in expected
GDP growth this year. China and India once again lead the pack in world growth; I don’t
a lot of faith in these predictions but I hope the experts are right…
International Investments to watch
PowerShares Intl Dividend Achievers
Symbol
PID
Sector
International High dividend stock
Risk
Moderate
Return
Moderate+
Complexity
Simple
Time Horizon
Long term (36 months – 60 months)
Tax implications
Consult tax advisor (unknown)
Account(s)
Taxed and IRA
This is a diversified ETF with international higher yielding large company common stock
with a current yield over 8% (assuming no dividend cuts). This also is paid in foreign
currencies so you expect an increase with a weaker dollar.
iShares MSCI Emerging Markets Index
Symbol
EEM
Sector
Emerging Markets ETF
Risk
Moderate
Return
Moderate+
Complexity
Simple
Time Horizon
Long term (36 months – 60 months)
Tax implications
Consult tax advisor (mostly at 15%)
Account(s)
Taxed and IRA
This is a diversified one stop shop for getting your feet wet in emerging markets. I also
like that fact that options are traded against this instrument. See the link below to find
how diversified this instrument is.
http://www.ishares.com/fund_info/holdings/holdings.jhtml?period=m&symbol=EEM
Copyright © 2009 by Mark A. Rush
0.7%
0.6%
0.6%
0.6%
0.6%
0.3%
0.3%
0.1%
iShares MSCI “EAFA” Europe, Australia and Far East Index Fund
Symbol
EFA
Sector
International ETF
Risk
Low +
Return
Medium+
Complexity
Simple
Time Horizon
Long term (36 months – 60 months)
Tax implications
Consult tax advisor (mostly at 15%)
Account(s)
Taxed and IRA
This is one of my core holding and is a global stock fund, everyone should watch how
this is performing. It is also part of my “model portfolio”.
iShares MSCI Brazil Index
Symbol
EWZ
Sector
International ETF
Risk
Moderate
Return
Moderate +
Time Horizon
Long Term (36 months – 60 months)
Account(s)
Taxed and IRA
With a 3.4% GDP growth expected, this is one way to get some exposure to South
America.
Morgan Stanley Capital International Australia Index
Symbol
EWA
Sector
International ETF
Risk
Medium
Return
Medium+
Complexity
Simple
Time Horizon
Long term (36 months – 60 months)
Tax implications
Consult tax advisor (mostly at 15%)
Account(s)
Taxed and IRA
I own this to invest in China and India indirectly; I believe that Australia is a place to
invest because of its raw materials and the proximity to India and China. This ETF is
traded in the US that matches the Australian stock market, which is a significant supplier
of raw materials to Asia. This stock has also taken as commodity prices have fallen.
Copyright © 2009 by Mark A. Rush
iShares MSCI South Korea Index
Symbol
EWY
Sector
International ETF
Risk
Moderate +
Return
High
Time Horizon
Medium term (12 months – 24 months)
Tax implications
Dividends are taxed 15% rate
Account(s)
Taxed and IRA
South Korea is another indirect play regarding china. One advantage is that their
northern neighbor helps to keep these stocks cheap. Unfortunately they will remain
cheap as long as Kim Jong Il stays in power. But given that I think that he just likes
being the center of attention I don’t think war will break out.
iShares FTSE/Xinhua China 25 Index
Symbol
FXI
Sector
International ETF
Risk
High+ + +
Return
Extraordinary
Time Horizon
Very Long term (5 years – 10 years)
Tax implications
Consult tax advisor (mostly at 15%)
Account(s)
Taxed and IRA
This ETF fell over 45% last year but when the economy recovers this will need to be a
core holding for me.
Copyright © 2009 by Mark A. Rush
Chapter 6
Mark’s Model ETF Portfolio
Asset reallocation
General profile for a several diversified portfolios
Risk
Adverse Balanced Growth
30%
40%
US Large Cap: 20%
10%
20%
US Small Cap: 10%
10%
20%
30%
International:
35%
10%
Fixed Income: 50%
10%
5%
0%
Cash:
Aggressive
30%
30%
40%
0%
0%
US Large Cap:
SPDR S&P Depository Receipts (SPY) 33%
NASDAQ 100 Trust Shares (QQQQ) 33%
Vanguard Value VIPERs (VTV) 33%
US Small Cap:
iShares Russell 2000 Index (IWM) 100%
International:
iShares MSCI “EAFA” Europe, Australia and Far East Index Fund (EFA) 50%
iShares MSCI Emerging Markets Index (EEM) 50%
Fixed Income (Bonds):
iShares Lehman 20+ Year Treasury Bond (TLT) 25%
iShares Lehman 7-10 Year Treasury Bond (IEF) 25%
iShares Lehman Aggregate Bond (AGG) 25%
iShares GS $ InvesTop Corp Bond (LQD) 25%
Cash:
iShares Lehman 1-3 Year Treasury bond (SHY) 100%
Copyright © 2009 by Mark A. Rush
Year to Date Returns
Symbol
Name
SPDR S&P Depository Receipts
NASDAQ 100 Trust Shares
DIAMONDS Trust
Vanguard Value VIPERs
iShares Russell 2000 Index
iShares MSCI “EAFA”
iShares MSCI Emerging Markets
iShares Lehman 20+ Year Treasury
iShares Lehman 7-10 Year Treasury
iShares Lehman Aggregate Bond
iShares GS $ InvesTop Corp
iShares Lehman 1-3 Year Treasury
SPY
QQQQ
DIA
VTV
IWM
EFA
EEM
TLT
IEF
AGG
LQD
SHY
12/31/07
Price
$90.24
$29.74
$87.52
$41.16
$49.24
$44.86
$24.97
$119.35
$98.53
$104.20
$101.65
$84.66
12/31/08
Price
$79.52
$30.32
$75.84
$33.86
$42.05
$37.59
$24.81
$105.71
$96.59
$101.47
$94.12
$84.32
YTD
Gain %
w/o Div
-11.88%
1.95%
-13.35%
-17.74%
-14.60%
-16.21%
-0.64%
-11.43%
-1.97%
-2.62%
-7.41%
-0.40%
YTD
Gain %
w/ Div
-11.26%
2.11%
-13.14%
-16.82%
-14.32%
-16.21%
-0.64%
-10.95%
-1.45%
-1.95%
-6.45%
-0.08%
As you can see, everything got hit except the Nasdaq. Emerging Markets and short term
bonds held up ok. Clearly bonds are not a safe haven any longer.
Results for the various “no brainer” portfolios
’09 Return (YTD)
Risk
Adverse
Balanced
Growth
Aggressive
-6.84%
-7.87%
-9.82%
-10.60%
-42.39%
’09 Return (implied)* -27.35% -31.50% -39.28%
-8.18%
-18.66% -33.90%
-39.60%
’08 Return
7.82%
9.40%
10.04%
10.45%
’07 Return
9.72%
13.63%
19.09%
21.83%
’06 Return
5.49%
7.55%
9.73%
11.77%
’05 Return
* If returns maintained their current pace for the rest of the year this would be the losses.
If the current market conditions fail, bond holders/risk adverse portfolios could
experience what the aggressive portfolio felt last year in terms of losses.
Copyright © 2009 by Mark A. Rush
Chapter 7
Final Thoughts
The Good






Interest rates are low
Low energy prices are pumping billions back into the world economy each day
Commodity prices are cheap
The risk of a massive depression has been greatly reduced by central banks
China is implementing “real stimulus”
Credit spreads and volatility indexes (fear indexes) are off their highs
The Bad









Housing prices are weak and still falling
High unemployment and trending higher
Falling Tax receipts due to financial turmoil
Exploding Budget deficit due to increased spending
Governments interfering/controlling free market values of goods and services
Potential for hyperinflation
Congress is full of economic idiots who think they can fix everything
Higher Taxes in 2011 on capital/production
Very regressive carbon tax or “consumption tax” staring in 2012
The Ugly







Potential for a monetary collapse
Recent action by the US Government has put the long term economy at risk
Potential for national debt spiral both public and private
The government has grown substantially and will continue to do so
Potential for US bonds may be downgraded
Potential for currency collapse
Unforeseen events “X”
Final thoughts:
Mayhem reigned supreme in the markets during the past year, but it appears the risk of a
complete and utter collapse of the financial system has been reduced significantly, but it
has not been eliminated. The aggressive action by the world governments may have
contained the damage but it may have only delayed the inevitable. The risk is that the US
Government has probably saved the credit market but it has gambled with the credit
rating of the United States of America in the process. We may have averted a depression
but have raised the real possibility of a total collapse of the US dollar/world economy.
Copyright © 2009 by Mark A. Rush
Helpfully we will move through this phase and it will most likely be followed by a period
of inflation/high inflation/hyperinflation (no one knows for sure). For now any
investment strategy is extremely risky including sitting on the sidelines in cash. No one
knows what will come next and no one knows what the true value of anything is…
I suspect by November of this year (or around Dow 6000) I will reverse directions and be
long the market via Ultra funds, Ultra long gold, Ultra short Treasuries (TBT), and be
long one house while short one 30 year fixed rate mortgage at ~4% as a defense against
the anticipated inflation caused by all the money we have printed. This part of the plan
could take months or years to pay off… Only the tea leaves know for sure.
I still don’t own a house or much of anything “real” but have been buying “things”. In
the strictest sense, I still have lots of little pieces of paper that lay claim to parts of
businesses around the world. Even those pieces of paper aren’t even real and are only
bits of scattered data strewn across the internet.
When everyone was borrowing I was saving and now that the US savings rate is over 5%
it is time for me borrow. Rarely in my life have I ever borrowed money but now I want
to find ways to borrow paper (take out loans) and own physical objects. If the dollar
becomes worthless sometime in the future I will still own the objects but can payback the
loan with that worthless paper. I now believe that debt is an asset if used wisely.
This is the conclusion of my report, I hope to get the next report out by July 5th 2009 and
entertain you with my new thoughts and reflections. Please send any questions,
comments or topic ideas for future issues to me via email. GOOD LUCK!!!
Regards,
Mark Rush
[email protected]
Copyright © 2009 by Mark A. Rush