Corporate Short-Term Bonds A Safe Play

If you were smart enough to have invested during the dark days of 2008's fourth quarter and 2009's first quarter congradulations. Now what? Well, one alternative is to just let it ride. The market is always forward looking and all leading economic indicators remain high. If you have a long-term plan then stick to it.

But like all markets nothing ever goes straight up or down so you may want to protect a large percentage of your gains by moving into something more conservative. And if you liquidated your stock investments during those dark days now's probable not the time to jump back in. You'd be better off hoping for another 5-8% pull back. Whatever your situation one conservative alternative to doing nothing or hiding your money under the mattress is to invest in Short-Term (no-load)Bond Funds.

Steven Huber, co-manager of the T. Rowe Price Strategic Income fund, says corporate bonds - domestic and foreign - are a good conservative investment within a improving economy and near-term ultra low interest rate enviorment.

Here's a list of some Short term: Bond Funds with the best performance in their category for the last 3 months.

My favorites for those who want no risk but seek yields above the Mutual Fund Money Market Funds (MMF) less than 1/2% yield is to just move your money to an FDIC insured US bank MMF which currently pay just over 1%. It's a pittance return but that's still a 50% increase over Mutual Fund Money Market Funds which are not FDIC insured. So, it's more yield, less risk.

Individuals with more than $3,000, willing to take a tiny bit more risk, should consider my favorite four no-load, extra conservative Bond Funds, from Vanguard:

#1)Vanguard Short Term Bond Index Fund - Investor Shares Class - VBISX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________101%
Total Portfolio Assets ($B) _____________$10.5
Minimum Investment ____$3,000

#2) Vanguard Intermediate Term Bond Index Fund - Investor Shares Class - VBIIX
Annual Management Expense Ratio _____0.18%
Annual Portfolio Turnover _____________86%
Total Portfolio Assets ($B) _____________$3.2
Minimum Investment ____$3,000

#3) Vanguard Short Term Federal Fund - Investor Shares Class - VSGBX
Annual Management Expense Ratio _____0.19%
Annual Portfolio Turnover _____________89%
Total Portfolio Assets ($B) _____________$8.6
Minimum Investment ____$3,000

#4) Vanguard Inflation-Protected Securities Fund - Investor Shares Class - VIPSX
Annual Management Expense Ratio _____0.20%
Annual Portfolio Turnover _____________28%
Total Portfolio Assets ($B) _____________$19.3
Minimum Investment ____$3,000

#5) Vanguard Short Term Investment Grade Fund - Investor Shares Class - VFSTX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________49%
Total Portfolio Assets ($B) _____________$20.4
Minimum Investment ____$3,000

#6) Vanguard GNMA Fund - Investor Shares Class - VFIIX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________63%
Total Portfolio Assets ($B) _____________$32.6
Minimum Investment ____$3,000

#7) Vanguard Intermediate Term Investment Grade Fund - Investor Shares Class - VFICX
Annual Management Expense Ratio _____0.21%
Annual Portfolio Turnover _____________48%
Total Portfolio Assets ($B) _____________$9.6
Minimum Investment ____$3,000

Investment research overwhelmingly shows that lower cost fixed income funds tend to yield higher bond investing returns.
The fixed income asset market is no place for you to try to beat the market and to attempt to get higher returns by picking your own bond. Even professional fixed income asset market money managers do not beat the bond market. The higher the mutual fund company expenses, the lower the net returns to individual investors.

Why Not Long Term Treasuries Bonds Now?
If Treasuries have been such a success story, why not stick with what’s worked? Here’s why: Because they were too successful. When investors rushed into the safe arms of a U.S. government guarantee last in the fourth quarter of 2008, Treasury prices soared and yields evaporated.

Yields have been slowly rising on long-term government bonds. Between the Federal Reserve’s recession-fighting rate cuts and the panicky investors flooding the market, Treasury yields are so low that prices have nowhere to go but down. Bond prices and yields move in opposite directions which is the primary reason I'm suggesting short-term investment grade corporate bonds. “For the most part, today’s Treasury market is a place where the average investor can only lose money,” says 80-year-old Ben Jacoby, co-founder of Brinton Eaton Wealth Advisors and a veteran of the long bear market of the 1970s.

Going forward, the picture looks bleak for Uncle Sam’s bonds. To pay for the gargantuan stimulus package, the government will issue even more of them, flooding the market. “Yields will have to rise for those bonds to find buyers,” says Dan Fuss, vice chairman of fund company Loomis Sayles, and that will depress the value of existing bonds. Now that investors may have regained their appetite for stocks, it’s entirely possible that they’ll dump bonds, further driving up supply. Another threat to bond values is inflation, which, by reducing the future value of bond yields, also puts downward pressure on prices.

You might think that if the stimulus spending proves inflationary, you should take a look at Treasury inflation-protected securities, or TIPS. But those have low yields too, and Fuss isn’t upbeat about their prospects. “It will be a while before there is any inflation to protect yourself from,” he notes. Still, everyone agrees as the economy continues to improve inflation will return. The price of Oil has already doubled from 2008's fourth quarter low.

Brazilian Stocks Are Hot

International stocks continue to gain popularity as investors look to align their portfolios with emerging market economies and creditor nations.

China, India and Brazil are all economies with a growing middle-class on the rise. A rising middle-class in America was accompanied by a rapidly rising 20 year market from the 1950's to 1970. Just something to consider. I'm not totally comfortable with investing in emerging markets. But my eyes can not deny the trend in growth and in stock prices.

Consider Brazil. Brazilian stocks have been among the top of the emerging market list, with the South American juggernaut being fueled by a pro-growth government, booming exports and the modernization of its infrastructure.

Pro-Growth Government

Brazilian President Luiz Inácio Lula da Silva, otherwise known as "Lula", has led the country's pro-growth strategy, appointing the market oriented economist and former CEO of Bank Boston Henrique Meirelles as head of the Brazilian Central Bank. Lula and his administration quickly strengthened the country's relationship with the IMF by renewing agreements and paying off its debt early.

Next up was the Growth Acceleration Program, an initiative designed to free the country's economy from growth constraints. By 2008 Brazil had became a creditor nation, with its debt recently getting the nod from Standard & Poors as investment grade.

Booming Exports

Much of Brazil's incredible growth trajectory is being driven by its strong export business as a commodities powerhouse. Here is a big surprise to me. Brazil is the world's leading beef and soybeans exporter, and ranks high in a number of other agricultural categories like chicken, orange juice and coffee. With the exception of coffee these are all areas where I was use to the USA being the agricultural export powerhouse. Brazil's service industry is also on the rise, with new exchanges and financial services companies helping to create a more balanced economy.

Infrastructure

An infrastructure story will be a recurring theme associated with emerging markets, but infrastructure development is literally and figuratively the road that leads a country to prosperity. In 2007, Brazil launched a four-year plan to spend $300 billion to modernize its roads, power plants and ports. The development of modern infrastructure and middle-class amenities has helped Brazil establish credibility as a progressive nation and future economic leader.

Now comes the important part, how to capitalize. One way would be to move to Brazil and invest in a textile plant or soybean farm. That actually sounds like a lot of fun, but might not be realistic for most of us. Here is an easier way; buy Brazilian stocks.

There are plenty of great Brazilian stocks that trade as ADRs on American exchanges, providing a nice dose of transparency and regulation to a less familiar investment destination. Here are four Brazilian stocks to watch. Interesting to note that while the USA stock market stands near it's 1999 high our market has been used to raise trillions for foreign stocks.


Basico do Estado (SBS - Analyst Report) provides sanitation and environmental services in Sao Paul, the most populous Brazilian city. As a utility, this is one of the more conservative Brazilian stocks, but that helps create a more balanced approach to the market. The Zacks #2 rank stock looks like a great value pick, trading at just 6.5X projected current-year earnings.


Petrobras (PBR - Analyst Report) is a oil stock many may be familiar with as one of the more popular Brazilian stocks. This integrated energy company will be involved in some of the largest oil projects in the world in coming years as it works to tap into the deap-sea discoveries off the coast of Brazil. The next-year estimate looks solid at $3.57, a 22% growth projection.


Gafisa SA (GFA - Analyst Report) is a Brazilian real-estate developer. The company just reported amazing third-quarter results, with its revenue more than doubling from last year. Analysts are looking for next-year earnings of $2.79 per share, a bullish 72% growth projection. Based on the current-year estimate, GFA has a forward P/E multiple of 20X, a reasonable valuation for a company growing this quickly in the strong Brazilian economy.

Why It's Not 1982 Again

Two Cases For A Continued Bull Market, Ronald Reagan style. Both cases made by two very qualified sane men based upon the 1982 Economy and Bull Market begining. But, as much as I wish it to be true, I'm afraid I must agree with other less optimistic Economist and Novelist Thomas Wolfe who concluded "You Can't Go Home Again". Still, the Perma-Bears need to face the trillion dollar fact. There is a trillion dollars inside money market mutual funds earning less than 1/2% looking to be invested on any little pull-back. Yes, it's possible we stay in Bull mode through year end on are way back to pre-Lehman Brother levels. Still, the 2001-2002 market is fresh in my memory and my worry.

Excerpts from James Grants Sept. 19th, 2009 article: From Bull to Bear. James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery. Even more amazing is the fact James Grant is a student of financial history and Perma-Bear who just been converted to a Bull believer.

"...Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

"Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten.
...
At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor under utilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points.
...
Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%."

Excerpts from Economist Michael Mussa Sept. 20th, 2009 presentation: Ex-IMF Chief Economist Rosy View as viewed by Kevin Hall -

"The recession is over and a global recovery is under way," he began, unveiling a pile of data and historical charts to support his view that forecasters regularly underestimate recoveries – and are doing so again.

Where the IMF foresees just 0.6 percent year-over-year growth in 2010 in the U.S. economy and 2.5 percent globally, Mussa sees 3.3 percent growth in the U.S. economy next year and 4.2 percent growth globally. He projects a U.S. growth rate of 4 percent from the middle of this year through the end of 2010.

All forecasts tend to under predict the recovery. … I think that's what we are seeing this time," said Mussa, now a senior fellow at the Peterson Institute for International Economics, a leading research organization in Washington.
...
Mussa pointed to forecasts made at the end of the 1981-1982 recession, the closest approximation to today's deep downturn. ...

The Reagan administration projected a growth rate from December 1982 to December 1983 of 3.1 percent, as did the Federal Reserve. In fact, the real growth rate turned out to be 6.3 percent."

Two excellent articles -with one common comparison flaw. They both use the 1982 Ronald Regan bull market beginning to make their case but ignore what happen in 2002 after a much smaller recession ended in 2001.

Both point to how Economist were too pessimistic in their growth forecast and correctly pointing out how the actual recovery starting in 1983 had six quarters of outstanding GDP growth (5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%).

They make an excellent point about Economist forecast but even rosy glasses Ex-Chief Economist Mussa is forecasting only 3.3% GDP for the USA next year.

This leads me to ask three questions:

1. How can 3.3% 2010 GDP led to six quarters of quarterly growth like the 1983 time period they reference?

2. Why do they ignore what happen in 2002 when the market declined for three straight quarters back to the 2001 lows, after the recession official ended in 2001?

3. Is America's 2009 economy similar to 1982-83?

Unfortunately (for me) 2009 is not like the 1973-83 stagflation economy. Back then Treasury Secretary Paul Volcker's needed to crush inflation with the highest interest rates in American history. ( I wishes this was 1982 so my savings would be earning 9-12% in my MMFs instead of 0.25%. I feel like I've been robbed by the 2001-2009 federal reserve policy ) .

If you are under 40 and think mortgage rates are a little high take a look at the 1979 to 1981 Bank Prime Rate in America. Notice how in 1981 the banks started lowing the Prime Rate (resulting from the Federal Reserve lowering the discount rates) from 20%to 11% in 1983. Yes, I said 20%.

This move alone allowed Stocks to rise as the value of each dollar of revenue or profit became more valuable in a lower inflation and interest rate environment. This phenomenon is call P/E expansion. You can see the proof from 1982 to 1999 as the average Standard & Poor Stock P/E rose from 7 to 32 as inflation and interest rates declined and the economy became more robust.

The decline from 20% in 1981 to 11% in 1983 also generated that fantastic six quarters of high GDP growth. I'd conclude that cannot be repeated in this environment.

Now just think about Car, Clothing and Appliance sales in 1982. The big three were all American. Imports were a much small percentage back in 1982. Today most appliances and clothing (just to give two examples) would be made outside America. In 1982 as those lower interest rates increased sales, American factories employed more American workers, who in turn had more money to buy more stuff (of which a much higher percent was made in America and nothing was made in communist China or Vietnam).

Now flash forward: Federal Reserve discount rates are already close to ZERO (no spending is being held back by high interest rates like 1981-82). Consumer debt is still at high levels and a recession like this causes even dual income employed families to want to spend less. Today when Americans do spend more money a much larger percentage goes to employing people outside America (than 1982-83).

Janet L. Yellen President of the Federal Reserve Bank of San Francisco (far more qualified then I) sees no comparison. And Nobel Prize Economist Paul Krugman explains why there is no comparison using the same logic.

"A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.

... Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. And that means that the Fed can't just cut interest rates and boost housing. This recession is very different than the early '80s".

The Bottom Line

NO, this is not the beginning of the 1982-87, Ronald Reagan, Bull Market style economy. No I'm no Bear, just a Bull (on tip toes) who remembers the 2001-2002 market. Yes, we can defy gravity and remain in Bull mode for the remainder of the year. Still, this decade will not be remembered for the great American Bull Run. This decade will be remembered as the decade for emerging market stocks.

1982 will be remember for many things like the Jackson Thriller album.



July 27, 1982 | GetBack Media

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The World Wide Stock Market Recovery

World stock markets rallied on Thursday, with London following Wall Street, striking its highest level so far this year, as investors grew more optimistic about the prospects for a global economic recovery.

Tokyo shares surged 1.68 percent on Thursday, tracking overnight gains on Wall Street where New York stocks climbed to the highest level in 11 months on upbeat factory data. Markets were also lifted by rising commodity prices which gave a shot in the arm to the energy and mining sectors.

Elsewhere in Asia on Thursday, Hong Kong jumped 1.71 percent, boosted by resource stocks on the back of rising commodity prices, dealers said.

Chinese shares closed up 2.02 percent on Thursday, also led by oil and metal stocks.

The USA economy and employment outlook may be an L shape or W shape recovery. But for now the world markets are clearly in a V shape recovery mode similiar to 2003. Lets hope it's not similiar to 2001 when we had a major market recovery after the 9/11 market colapse only to decline back down in 2002.



The MSCI World Stock Market Index reached a new 11-month high yesterday, rising to the highest level since early last October. From the March bottom, the index is up by 65% (see chart above).



The Bloomberg U.S. Financial Conditions Index reached a two-high yesterday, closing at the highest level since August 8, 2007 (see chart below).

Zimbabwe, Hyper-Inflation Are We Next ?

Yes, it's real money. Or at least it was until just recently when the government of Zimbabwe declared its own paper money worthless

This recently printed One Hundred Trillion Dollar Zimbabwe note (above)use to buy only 300 America dollars. Now it's totally worthless. The 100 Billion Dollar Zimbabwe note (below) was said to have bought just three eggs.

Could this happen in America? Is this the destiny of the American dollar?Zimbabwe is a place where our poor American dollar is still King Dollar. Do your homework and read this article before you decide.


Had Americans sold their S&P index fund holdings in 1999 and just purchased gold bullion to bury in their back yard they would have tripled their money. No question the new 21st century has seen the decline of the American dollar and rise of emerging markets. Certain trends have been evolving for years. For this reason I posted a link to a free educational webcast hosted by U.S. Global Investors CEO Frank Holmes and world famous Dr. Marc Faber.

The Republic of Zimbabwe formerly known as Southern Rhodesia, and the Republic of Rhodesia like most African countries has a history that one must understand prior to making the usual economic shock jock comparisons to America. The shock jocks want to use "shock and awe" tactics to garner listeners while the gold bugs want to talk up the value of their gold and commodities investments.

Now I know predictions of total doom for America win 90 out of 100 times in the blogosphere. If you want to increase traffic talk smack and doom. One word of green shoots is political readership suicide. It's understandable. People are anger, many unemployed. The economies in the dumpster and real American unemployment rates are around 16.5%. You, can bet that I have no rosy story to tell. As former President Bill Clinton use to say, "I feel your pain".



Yes, the current financial crisis and our declining American dollar is a symptom of decades of mounting debt and economic decay. It's a major nightmare. And it's debatable if we're seeing the light of daylight at the end of a tunnel, or if that's the head light of a 28,000 pound, on-coming (debt burden) locomotive -roaring towards us.

I'm posting these stereotypical shock jock video's for four reasons: 1) Maybe we need "shock and Awe" to wake us up. 2) They contain some excellent education information. 3) In 1975 to complete my minor in Economics, I took a course in African Economics, so I've an understanding of histories impact and desire to stay abreast of African issues. 4) They show how Economist Greenspan and Bernacke had no understanding of how holding interest rates so low was like pouring gasoline on a real-estate forest fire bubble. Given their advance education and age, even I was shocked by boomer brother Ben's lack of real-estate knowledge. See my post on California Day Dreaming Homes.

But please, for your own education learn more about Africa and Zimbabwe's history. You'll gain an understanding of what led to its current social and financial debacle. These video's provide a glimps of the Zimabwe nightmare.

I'll give my followers more insight than those whose only goal is to pump up the value of their gold bullion bars. You may disagree with me. But in the process we may both learn something. And that's the value-added of this blog.



How bad is Hyper-inflation in Zimbabwe? Well, the words hyper and inflation were two separate words now made into one word in Zimbabwe's vocabulary. Hyperinflation in 2007 and 2008 made Zimbabwe's currency virtually worthless despite the introduction of bigger and bigger notes, including a 5, 10, and 100 trillion dollar bill !

Yes, I said Zimbabwe issued a 100 trillion dollar bill (top photo)

Zimbabwe recently announced the official suspension of the Zimbabwe dollar for at least one year. Can you image having earned a 100 trillion dollar bill that your government will no longer honor?



Extra Credit Education for advanced learners below:

Yes, excessive paper money creation combined with a our transition to a debtor nation is very problematic. Now the usual gold bugs and financial fear mongers are talking up their gold investments by comparing the USA dollar decline to the now worthless Zimbabwe dollar. We do need to learn from Zimbabwe's financial chaos. But their simplistic comparisons fail to discuss how the once wealthy nation (by Africa standards) with the highest literacy rate has been mismanaged and micro managed for decades by a dictator. Robert Mugabe ranks number one on the charts of The World's Worst Dictator.

The valuation of any currency has numerous variables which impact the currency’s value and exchange rate . The value of a currency is affected by exports, imports, foreign currency reserves, balance of payment position , economic activity and many other factors.

You don't need a Ph.D. in Economics to know if Zimbabwe has nothing to sell to the world and imports everything, that's a problem. If no wants to invest in Zimbabwe or put money in their banks, thats another problem. Yes, America has problems. But we still have things the world wants to buy and considered among the worlds stable governments. Although demand for the dollar is falling it's still the worlds most used currency. During the peak of the World Financial Crisis money from around the world sought safety by buying US Treasuries. The gold bugs perdiction of gold $2,000 was proven to be a folly as the fear of deflation cause it to lose value as fast as stocks. You can bet no one wanted to invest in Zimbabwe during the crisis, nor does anyone wish to keep money in a Zimbabwe bank.

Zimbabwe has had decades of social and economic problems. The recent confiscation of farmlands from white Zimbabwe citizens led to a sharp decline in agricultural exports, traditionally the country's leading export producing sector. No sane western country would want to invest in Zimbabwe with Robert Mugabe in charge. As a result, Zimbabwe is experiencing a severe hard-currency shortage, which has led to hyperinflation and chronic shortages in imported fuel and consumer goods. In 2002, Zimbabwe was suspended from the Commonwealth of Nations on charges of human rights abuses during the land redistribution and of election tampering.

The general health of the civilian population also began to significantly flounder and by 1997 - 25% of the population of Zimbabwe had been infected by HIV, the AIDS virus. Life expectancy at birth for males in Zimbabwe has dramatically declined since 1990 from 60 to 37, among the lowest in the world. Life expectancy for females is even lower at 34 years. All this under the leadership of Mugabe.

Warning these videos are not for those who want to walk in the park and smell the roses. Finding Gold for daily Bread. Here is what's left of a once propsperous country. This is how a dictator gets votes to proclaim he runs a democracy. Democratic Apocalypse - Zimbabwe

Namibia-based tribunal of the Southern African Development Community ruled in October 2008 that Zimbabwe’s land reform program was racist, discriminatory and illegal. This Robert Mugabe dictator policy dates back to 1999. And like most so called "Freedom Fighters" of the past e.g. Castro brothers (Cuba) and Idi Amin (Uganda)they use their nations initial admiration to leverage themselves into a lifetime Dictatorship in President's clothing.