technical research at Bateman Eichler, Hill
Uncharted Waters III Richards, Wright put in over 20 hours
meticulously preparing his talk, and came
By William Parmenter, editor equipped with 101 slides. (That slide show,
already posted on the chapter website at
What will the new normal look like? www.aaiilosangeles.org. provides a wealth of
What will be the trends? What is in store for information in a number of categories on
global markets for the year 2010? These were important economic trends.
questions addressed by David Wright at the Jan. For context, Wright started his talk by
16 meeting of the Los Angeles chapter of AAII at looking at the last decade. The current debacle
the Skirball Center. started with the tumultuous year of 2008, which
Wright and Tom Petruno, a financial saw Bear Stearns being sold in March, oil
editor at the Los Angeles Times, spoke to a sell- hitting $146 a barrel in July, Lehman Bros.
out crowd, in what has proved to be the most collapsing in September and the TARP bailout
popular and well-attended in the annual series of of $700 billion being passed in October. That
financial-education lectures. year the Dow plummeted from 13,264 to 7,552.
Wright is a principal at Sierra Investment Two major shocks to the nation‟s wealth
Management, Inc., a firm that manages over $620 occurred in the last 10 years. The value of
million in client assets. He was a member of the stocks, measured by the S&P 500 dropped 50
Los Angeles AAII board of directors for twenty- percent, and the value of houses dropped 40
three years. percent. One-third of families with mortgages
A capsule summary of Wright‟s talk is that are now under water.
the stock market looks risky now and into the In his report card for 2009, Wright
future. The market seems poised to take another looked at stock and bond indices. From a base
sharp turn down in a multi-year secular bear of 100, the NASDAQ Composite dropped to
market. Bonds outperformed stocks in 2009 and, around 80 in March, the global fear bottom, and
he predicted, they will do so for the next five by year‟s end climbed to 140. The S&P 500
years or so. He concluded by offering investors dropped from 100 to 75 and climbed to125.
offensive and defensive money-making strategies.
Wright was pessimistic, but not as
pessimistic as Marc Faber one of Barron‟s
Roundtable Panelists forecasting the year 2010. Table of Contents
David Wright..................Uncharted Waters ………...p.1
Commenting on trillion dollar federal deficits as Tom Petruno………...…Investing in 2010....................p.6
far as the eye can see ahead, Faber commented, William Parmenter……..New Normal………..………p.8
“… we are all doomed.” Don Gimpel…………….Education Nuggets…………p.8
Consistent with having been director of Marilyn Cohen………….Bond Investing………..……p.9
On the other hand, 2009 was a huge year dropped from 100 to about 50 in March, 2009
for bonds, except for U.S. Treasuries, which had and then partially recovered to 85 by year‟s end.
one of their worst years ever. Treasuries dropped Northeast Investors Trust, a high-yield
from a base of 100 to 75. Other bonds, including corporate bond fund, dropped to 55 and then
high-grade corporates, high-yield corporates, the climbed to 105. SEI International Emerging
floating rate, and emerging market debt, dropped, Markets Debt fund dropped to 67 in November,
from a base of 100, then recovered to from 130 to 2008, then climbed to about 113. This emerging
170. market bond fund showed lower volatility and
The top performer was high yield great performance on the up cycle.
corporate bonds, which turned up only when Managers Bond Fund, a high-grade
stocks did (after the global fear bottom of March, corporate bond fund, dropped to 80 in
2009) and then outperformed all, going from a November, 2008, then climbed to 114 by end of
bottom of 55 and then climbing to 105 2009.
Wright surveyed the performance of a Hartford Floating Rate fund declined to
number of economic indicators for 2009. Long- 67 and then climbed to 105. Putnam Diversified
term Treasury yields rose from a base of 100 to Income dropped to 53 and then ascended to 105.
150 in the first half of 2009, and thereafter were Principal Preferred Securities, a
flat. Long-term Treasury bond prices in the first preferred stock fund, dropped to 50 in March,
half of the year dropped from a base of 100 to 80 2009 and then climbed to 110. Pimco Foreign
and thereafter were roughly flat. Bond Institutional barely declined to 95 then
In 2009 the U.S. Dollar index dropped, climbed to 115.
after the global fear bottom, from 109 to 91 in
November, but after that rose to 96.
In 2009 crude oil dropped to 35 then rose Los Angeles County Meeting Schedule
to around 80 by year‟s end. A slide of short-term Computerized Investor Group – Saturday February 6. Speaker
interest rates showed them at 5 percent in 2006, Don Gimpel on “Watch the Numbers” at Veterans of Foreign
Wars Memorial Bldg. Culver Blvd. & Overland Avenue, Culver
then dropping rapidly to .02 percent. The Fed City. For information contact Don Gimpel, 310/276-9875 or
remains really worried, and has left short-term email@example.com .
interest rates at zero. It is attempting to re-inflate Pasadena Group – Meets at 7 p.m. at the Pasadena Main
the economy. Library, 285 E. Walnut St., Pasadena on the third Tues. of the
month, except for August and December.) Topic TBA. For
A slide of the monetary base, since 1960, information contact Ivan Wong, IWong82762@aol.com .
showed it jumping into the “red danger zone” Mutual Fund Group – Saturday March 6 at 10:30am at the
from $800 billion in 2008 to $1.8 trillion in late Fairview Branch Library, 2101 Ocean Park Blvd., Santa Monica.
John Kang, Fidelity Investments, will speak on “Fidelity Market
2009. The economy is on life support, and some Update with Investment Strategies”. For information contact
of the stimulus programs will end soon. The Gunter Hagen 310/457-7404, firstname.lastname@example.org. The
meeting is free to the public
concern is global, as there were 474 initiatives
Stock Selection Group - Norm Langhout, 310/391-6430,
around the world to stimulate the world economy. email@example.com. Fourth Wednesday of the month at 7 p.m.
Before going on to why the stock market Fairview Library, 2101 Ocean Park Blvd., Santa Monica. Topic
looks risky in 2010, Wright paused to point out
Options Special Interest Group meets at Community Room A at
the stellar performance of seven bond funds. (For the Westside Pavilion (corner of Pico and Westwood Blvds). For
detailed charts of their performance, look at slides information contact Robert Morgen at firstname.lastname@example.org.
number 20 through 26 on the chapter web site.) Los Angeles Chapter Skirball Center at 9 a.m, Sat. Feb. 20,
All the seven bond funds were tracked for 2010, Frank Barbera, editor, Gold Stock Technician, “What’s Ahead:
Overview of the Capital Markets and the Global Economy”; and
two years, from the start of 2008 up to end of Dr. Somnath Basu, professor of finance at California Lutheran
2009. All started with a base of 100, and were University, on “How to Build a Sound Retirement Portfolio”.
compared to the S & P 500, which over that time
Wright asked why are so many Americans Price earnings ratios of stocks went to 38
fixated by equities, given that all seven of the in 1999, and then dropped to 18 in 2002. The
bond funds preserved capital over a two-year P/E ratio was up to 150, way to high, at the end
period, and substantially outperformed the S&P of 2009. We have had two big drops in the S&P
500. What, he asked, makes more sense for 500 already. One was of 50 percent from 2000
clients over 50? This is a population cohort that is to 2002, and a second of 55 percent from 2007
interested in a stable income stream and to 2009.Now the market is poised for the next
preservation of capital. big drop.
Turning to the topic of why the stock Corporate earnings fell off a cliff in
market looks risky in 2010, Wright began by 2009, even worse than the 1929-1933 drop.
examining the trend in alternating secular bear Compared to previous recessions, earnings fell
and bull markets. He showed a slide, also much farther, around 90 percent, this time.
presented in his handout, that depicted the Dow Huge problems developed in the
Jones historical trend for the last 113 years. It economy, for example the growth of debt since
showed multi-year bull markets alternating with the early 1980s. Wall Street securitized new
multi-year bear markets. For the last ten years, products, which were mostly transparent or
since February, 2000 the Dow 30 has been in a regulated. Derivatives went rampant, to over
secular bear with a cumulative return of minus 4.7 $700 trillion in notional value. The world
percent. leveraged up.
During secular bears, there can be hopeful Currently household debt is falling, as in
rallies that market cheerleaders falsely herald as other recessions, and this reduces gross
the start of a new bull. For example the 1929 to domestic product. Total government debt is
1934 secular bear market was interrupted by six surging. Tax receipts at states and counties are
hopeful rallies. First the market dropped 48 dropping severely. There is $37 trillion of
percent, and then recovered 48 percent, while in a unfunded medical obligations.
longer term process of dropping a crushing total Housing issues remain a prominent
of 86 percent. symptom of the great unwinding of debt. The
Another secular bear market occurred housing bubble in home prices is now returned
between 1966 when the Dow touched 1,000 and to normal nationally. In California housing
1984 when the Dow declined to 764. During that prices may still have another 25 percent to fall
time there were big rallies, one of 67 percent and may not return to normal until May, 2011.
between 1970 and 1973, and another rally of 75 Delinquencies on home mortgages are
percent between 1974 and 1976. surging, and foreclosures have spread to “good”
Another cycle indicator Wright looked at loans in most states.
was the four-year Presidential cycle. It has often Bad mortgage loans started the
been the case that the market declined foreclosure surge. Now the issue is people
significantly during the second year of the losing jobs driving increased foreclosures.
president‟s term. Spreading unemployment has become the
Now it looks like the market is starting the leading cause of mortgage defaults. Five million
third major down cycle in the current secular bear jobs have been lost since March, 2008.
market. Last Jan. 13 may have been the top In the last 30 months the FHA has been
before the decline. The forecast is--Danger funding 50 percent of new home sales. The next
Ahead. bubble will be in FHA home-purchase loans.
Wright reviewed a number of other Housing starts are 50 percent below
indicators to show that the stock market looks normal. What is to replace their huge
risky going forward. contribution to employment from 2001 to 2006?
Commercial property prices have been in a 1988.)
steep decline. From a base of 100 in 2000, Industrial production has fallen to the
commercial property prices rose to a peak of lowest level in 59 years. With manufacturing
about 190 in February, 2008, and then dropped to continuing to decline where will the 20 million
120 in June, 2009. new full-time jobs be found to get back to
Unemployment issues contribute to a normal employment?
forecast for a risky 2010. Given the uncounted Capacity utilization of factories has
unemployed, the unemployment rate is pushing 20 fallen hard from 80 percent in 2008 to a current
percent. The most recent leveling off of jobs lost 68 percent. This is the lowest level of capacity
to the economy is only that, and may prove to be a utilization since 1965, and the trend line is still
temporary pause. steeply down.
Over the last nine years, many working- Rents and real estate prices are deflating,
age people have dropped out of the labor force. raising the specter of a deflationary spiral,
These discouraged workers are not counted in which once started is very hard to stop. The
official statistics, thus distorting them. deflationary spiral feeds on itself, going like
The length of time to find a job at 22.5 this: falling demand, falling prices, debt
weeks is the longest since 1950. It is very hard to defaults, bankruptcies, layoffs and wage
find a job now. Only 20 percent of the 2009 reductions lead back to falling prices and
college grads found one. another vicious cycle down. In such a situation,
Also hurting the economy is that total cash is king.
corporate payroll is falling Nearly $240 billion What will the new normal look like?
less was paid to the labor force in 2009, the first What will the economy look like when the dust
time in 43 years that total wages paid by major settles? How long before we reach that new
employers fell. equilibrium? What will be our (lower) standard
Decline in wages affects aggregate of living? What investment strategy will be best
household income, in turn affecting consumption, then?
which accounts for nearly 70 percent of the U.S. These are good, but essentially,
economy. Wright next turned his attention to rhetorical, questions. Before we get to the new
consumer issues and business contraction. normal there has to be a painful and lengthy
Consumer confidence recently dropped to transition. The economy, market volatility and
38, the lowest ever recorded in 43 years. (During the real estate bust have all led to widespread
those years consumer confidence fluctuated anxiety. U.S. investors have begun to lose faith
between 44, in 1974, and 143 in 2000.) in what Wall Street has told them for years. It
Consumers are paying down debt as will take years to produce 20 million new jobs,
employment falls, not a good situation for the and for Wall Street to adjust their investment
gross domestic product. thinking.
The household savings rate after peaking We may as well forget about the “new
at 13 percent in 1976 declined until it hit minus 2 normal” for now, as the transition will consume
percent in 2005. With the recession, the our attention for the foreseeable future.
household savings has popped up to 4 percent, Currently we are in uncharted waters. Today‟s
which reduces consumption and thereby gross market is not about volatility; it is about
domestic product. uncertainty.
At the same time that households are Investors are questioning the “cult of
suddenly becoming savers again, consumer equities.” The U.S. is the only culture on the
spending has fallen off a cliff, to .5 percent year planet that thinks it is sensible to allocate
over year. (It hit a peak of over 9 percent in significantly to stocks.
Even in the U.S., this focus on equities did Finally, use trailing stops to limit
not exist until the late 1940s. Before that people downside risk, and sell when any significant
were interested in secure income streams from down movement hits your stop.
conservative investments in bonds and real estate. The benefit of trailing stops is: a
The interest in equities was gradually sustained downtrend in that holding will not
created successively by Wall Street, the mutual impact the overall account beyond the set limit
fund industry, then permeated MBA schools, the (and any slippage); and, since you will not
CFA curriculum, and became the orthodoxy from tolerate large declines, you will be safe
the AAII to Main Street. By now the “cult of investing in somewhat more volatile asset
equities” has been fatally discredited—and the classes, and be more diversified.
worst may lie ahead. How will the recovery look? Wright‟s
During the 1990s, Wall Street preached prediction is that after hitting a temporary
“stocks for the long run,” and “buy and hold” bottom in April, 2009, rallying to a false peak
That approach would not have worked since 1999 on Nov. 30, 2009, the market will hit a cyclical
to 2009, when the S&P, although fluctuating, has bottom in summer, 2010—that is the next steep
been flat. leg down. Then there will be a gradually rising
Another dour example of stock market market. Such a scenario comes wrapped with
underperformance has been Japan‟s Nikkei Index. questions, such as, is the bottom still ahead?
Starting at 13,000 in 1985, the Nikkei rose to Will there be a double dip? Will the recovery be
39,000 by 1990. Since then it has plummeted, weak and slow?
punctuated by bull market rallies, to a dismal How has the Sierra Core Retirement
10,000. Fund, Wright‟s firm‟s mutual fund, been doing
Some problems with the “buy and hold” the last two years? In 2008 the S&P fell 37
equities idea are: the downside can be substantial; percent, while the Sierra Core Retirement Fund
one can go a decade or more without any gain; too gave up only 2.8 percent. In 2009, the S&P
much focus on one asset class leads one to not pay gained 26.5 percent, while the fund gained 30.8
attention to other profitable up-trends and new percent.
opportunities. The composition of the fund as of Dec.
Investors have multiple reasons for caution 31, 2009 was low-volatility funds, 11 percent;
in 2010. Unemployment may have passed the U.S. and foreign equity funds, 12 percent; high
„tipping point”. Some 18 million now want jobs. yield corporate bond funds, 10 percent; and
There is no credible scenario that puts those 18 other bond funds, 67 percent.
million back to work. The consumer remains the At the end of December, 2009 the top
key to the economy, and the consumer trends are ten holdings of the fund were:
negative. Putnam Diversified Income Y, 14.2 percent
The global bubbles in debt and leverage Principal Preferred Securities, 11.7 percent
have not been resolved—“big casino” lives on. A John Hancock II Floating Rate I, 10.2 percent
new down cycle in stocks looks likely. Pimco Foreign Bond Institutional 9.6 percent
Wright had some thoughts on a sound Pioneer Global High Yield A, 9.6 percent
investment strategy for the current turbulent Managers Bond Fund, 7.9 percent
market. Give thought to prudent asset allocation, Pioneer Strategic Income Y, 7.8 percent
considering what fraction of the portfolio should ProFunds Rising U.S. Dollar, 5.8 percent
be in each asset class. Fidelity Floating Rate High Income, 5.7 percent
Next, consider what stocks, bonds, mutual ProFunds Rising Rate Oppty 10, 4.8 percent.
funds or ETFs should be used to fill each pie
dead, is, paradoxically, becoming all too true for
Investing in 2010 Americans.
The long term financial picture is
By William Parmenter, editor between awful and dire. Various municipal and
state governments are deep in debt. California
Tom Petruno, financial writer and is the worst case with a projected $21 billion
columnist for the Los Angeles Times, spoke on dollar budget shortfall next year.
Investing in 2010: New Normals, Old Faithfuls The stock market recovery came due to
and Inevitable Surprises, at the Jan. 16 meeting of trillions of dollars being thrown at financial
the Los Angeles chapter of AAII at the Skirball systems. Bankers have turned out to be tone
Center. deaf. What will be the long-term price to pay
Petruno started by reviewing last year‟s for the stimulus? The fear is that the recovery
events. When the market collapsed in March, may not be sustainable. Mounting debt of the
2009 Petruno said he was afraid he would be out U.S. further limits fiscal options.
on the street selling pencils. What will be the new normal?
Then he quipped, quoting Winston We can expect higher taxes, a long
Churchill, “If you are going through hell, keep period of payback and an uncertain financial
going.” future. Loans and borrowing stole consumption
In March, 2009, it seemed like the country from the future.
was on the brink of another Great Depression. What about a recovery? The real
Stock prices were at twelve-year lows. The unemployment rate is around 20 percent if
banking system seemed about to be nationalized. everything is counted. If people stop being
An average of 700,000 people lost their jobs per afraid of losing their job, that could spark a
month in January, February and March. The auto modest recovery. But it still leaves a huge
industry was nationalized. structural unemployment problem. Jobs are not
The economy began to grow again in the coming back.
third quarter. The job loss last month was 85,000. Think of Cleveland, Ohio (Petruno‟s
There is a nagging doubt that the recovery is for hometown). When workers lost their jobs
real. Although the S & P 500 has come up off the several decades ago in the steel mills, women
low by 70 percent, the public is using it as an started working (say in a drugstore). And, they
excuse to sell. had a pension.
Domestic mutual funds lost an aggregate The difference today is that people have
of $19 billion in 2009. Bonds have suddenly no savings, no pensions, no job prospects and
become big, as $350 billion flowed into them. the value of their home dropped from $1 million
Bill Gross, founder of Pimco, bought a $23 to $400,000. “I expect that parents will be
million house in Newport Beach, to tear down and moving in with their children,” Petruno said.
build on the lot. What about equities? If corporate
Investors need to remember that fixed earnings are better there could be a modest
income (bonds) impose risk, too. As Will Rogers recovery. In part it will be driven by creditor
said, it‟s not the return on capital; it‟s the return of nations like China.
capital. Corporations have been ruthless in
Petruno expressed concern about two trying to attain efficiency. In the see-saw battle
embedded fears. between capital and labor, capital has the upper
The first has to do with debt. Baby hand. Over-population and the „world wage‟
boomers are up to their ears in debt. The joke works in capitals favor.
about the retirement system for Chinese workers At the end of 2008 a lot of forced selling
that their life fate was to toil until they dropped
was occurring. Margin calls were forcing payment?
everyone to sell. That is much less likely to People need to look at the cost of
happen now as there is a lot more cash out there. owning versus renting, especially in California,
There could be a recovery of corporate where home prices may not go up for years.
earnings. It seems unlikely that there will be Many corporations will do well over the
another systemic unraveling and meltdown like next ten years. There will be successful
we had. companies. Many journalists wrote stories on
What about the future of capitalism? the theme of the lost decade. But it was not a
The country has faced darker days in the lost decade for small cap value stocks, emerging
past. Think of the incredible destruction wrought markets and gold.
in the Civil War. Think of the systemic It is all about value and what you pay.
breakdown in the Great Depression. Investors need to do sound fundamental analysis
Worldwide opportunities are incredible. and make sure they are not overpaying.
Diversification is the ultimate answer. Four values determine what price should
“Hoping for the best” is not an investment be paid for a stock: taxes, regulation, interest
strategy. A stock should do well on its own, not rates and inflation. In the „90s all four were
because of your hope. When you rely on hope going down. (In 2008 interest rates went
you are on the wrong path. Abandon hope and negative.)
embrace reality. Have an incredibly diversified In the next five or six years it is most
portfolio. likely that all four variables will go up,
The American public now loves bonds, not representing a significant challenge to the case
stocks. The S & P 500 P/E is around 15. Will for a long-term bull market.
earnings come through? Where are the valuations Banks are to become like utilities.
now? Fairly valued could mean sell stocks. Hope that interest rates and inflation go
The fixed income investment long-term up. That could depress the P/E multiple to
trends will be amplified. (On this point Petruno under ten. That‟s a little pessimistic. So, be
agrees with Wright.) careful not to overpay, because then all you
We have a cult of income developing. have is hope.
Dividends are better than bond interest. (Bond Watch out for the deflation winds. They
interest does not rise; dividends can rise over are still blowing strong.
time.) After his wide-ranging talk, some of it
Investors bought banks for dividends in spoken in investor shorthand to a sophisticated
2000. In 2008 banks blew up. Under TARP audience, Petruno was joined by Wright in a
dividends were cut. question and answer session.
Corporations could make dividends Petruno was hopeful about the future of
(preferred stocks) more attractive. Dividends the BRICs and Latin America. Regarding
have a significant tax advantage over bonds, China, he quipped that their investors buy and
because bond income is taxed as ordinary income. hold for 30 minutes…it‟s a casino. China‟s
It should be a renters‟ paradise for the next strength is that they are creditors, not debtors.
ten years in Southern California. Housing was Brazil is exciting for the long run. They
overbuilt. We could still have a 25 percent have top managers and it was a good place to be
decline in housing prices. in the last decade.
In today‟s market houses are depreciating We are seeing a deflation in rents, and
assets. For a $400,000 home today you need a 20 real estate prices. Food prices, medical care and
percent down payment. How can people in the services are inflating. Energy is a wild card. A
middleclass come up with $80,000 for a down deflationary spiral is almost impossible to stop.
Wright noted the ETF industry is government regulation, a direction the Obama
booming. Money came out of mutual funds. administration is headed. Number three is de-
Conservative money went into bonds. globalization, in which various countries around
Speculative money went into ETFs. People buy the world will grow slower than usual. That
bonds, because they think they are safe. But there leads to lower returns on assets.
is market/credit, and interest rate risk. Evidence of these trends is showing up
Petruno commented that bonds are often a in the bond market, where yields on ten-year
way station. Usually they are less volatile than Treasuries are around 3.5 percent.
equities. There‟s no yield at the bank. The Fed The new normal is not an immediate
does not want you to hold cash; it wants to force outlook, as the economies of the most
you to take risk. The Fed would rescue money industrialized (G7) nations could grow around 4
funds (like they did with the Prime Fund). to 5 percent in the first quarter or half of 2010.
Wright recommended looking into bond Gross said the “new normal” is a longer-term,
mutual funds, to watch out for China, as officials you need to be vigilant and careful, type of
are lying about their growth numbers, and to outlook.
expect the dollar to go up in a multi-month rally.
New Normal in 2010
By William Parmenter, editor
By William Parmenter, editor
Dr. Don Gimpel‟s entertaining and
“The New Normal” is a term that Bill informative five minutes of investor education
Gross, founder and co-chief investment officer of started with a screen quote on “muddling
Pacific Investment Management Co., of Newport through” at the Jan. 16 AAII Los Angeles
Beach, coined last March. Chapter meeting at Skirball Hall.
New Normal is a term that might define Gimpel was quoting from Adrich‟s
the investment landscape for years or decades to website, referring to an economic recovery that
come, according to observations by Gross in the might last several years. According to Aldrich‟s
Feb.8, 2010 Forbes magazine. website it is “mostly free fall from here.”
The basic idea of new normal is that the Investors were invited to go to Adrich‟s
economy will reset after the crisis. It looks rather website at www.Adrich.com. which presents
grim down the road. In Jan. 2009, Gross forecast about 20 charts of what is happening in real
that the future would likely include a lowered time. Investors were invited to hear Adrich‟s
living standard, high unemployment, stagnant view on what will happen to the economy in
corporate profits, disappointing equity returns and 2010. Expected outperforming sectors are:
heavy government intervention in the economy. alternate energy, nuclear energy, international
Nor can investors look forward to much ETFs, medical companies, geriatric companies
from bonds, other than their mediocre coupons, and consumer staples,among others.
due to low interest rates. Gimpel offered a hearfelt welcome to
The outlook is that over the next few years Dr. Roy Shaal, the chapter former program
inflation will increase, the dollar will decline and chair, a „modern medical miracle‟, on his return.
foreign markets will outperform the U.S.
Gross again talked about what he
considered to be the new normal, in the Feb. 1,
2010 Barron‟s, mentioning three factors. One is
the process of deleveraging—paying down debt,
which is under way. Number two is more
Bond Investing in Our Crazy New World and know the debt distribution. The more
complicated the capital structure, the more yield
By William Parmenter, editor the investor should earn.
The municipal bond market generic
Marilyn Cohen spoke on bond investing to municipal „A‟ yields in Nov. 2009 were: one year
the Los Angeles Chapter of the AAII at the at 1.45 percent; five year at 3.05 percent; and, ten
November, 2009 meeting at Skirball Center. year at 4.25 percent.
She is the publisher of Forbes Tax Cohen made the following investment
Advantaged Investor, and the president of Envision recommendations:
Capital Management Inc., in Los Angeles. Jefferies Group at 5.5 percent, due March
When the stimulus party is over (i.e. the 15, 2016, CUSIP: 472319AB8, rated Baa2/BBB.
$700 billion of the federal government‟s Troubled Leucadia National at 7 percent, due Aug.
Asset Relief Program is all spent), beware of the 15, 2013, CUSIP: 527288AS3, rated: B1/BB+
hangover, said Cohen. Based on the stimulus, the Textron Inc. at 5.6 percent, due Dec. 1,
markets had a huge run; now, where do you 2017, CUSIP 883203BL4, rated Baa3/BBB-
rebalance? Alcoa Inc. at 6.75 percent, due July 15,
Regarding balance sheet repair, one can look 2018, CUSIP 013817AS0, rated Baa3/BBB-
at the tale of two markets. Corporates: share Picks recommended for ETFs were: ISHG
repurchases from 1997 to 2008, with $2.4 trillion iShares 1-3 year Intl Treasury, and, IGOV iShares
spent and terrible debt transactions. S&P Intl Treasury.
That was then. Now, there will be no more For more information on bond investing,
ego-driven buy backs. No more insane debt-driven one can consult the book, Bonds Now, Making
acquisitions. Equity is to be issued to pay down Money in the New Fixed Income Landscape.
debt. More conservative stewardship is ahead. Cohen and Chris Malburg were co-authors of the
Municipal bonds have not been a pretty book, which has a foreward by Steve Forbes.
story, but one rather of a great disconnect. In closing she recommended the following
What has been happening. Yields have been free websites, as being helpful for investors to
dropping. keep from having their pockets picked:
In municipals: the BABS effect: reduced www.investinginbonds.com., and
tax-exempt issuance. Credit quality has www.emma.msrb.org.
deteriorated and net yields dropped. It is all about Cohen may be contacted at her firm,
supply and demand, so Cohen admonished the Envision Capital Management, Inc. at phone 1-
investor to be defensive. 800-400-0989, website www.envisioncap.com.
In Corporates, new issuance has been The minimum account size is $500,000.
snatched up by institutions. It is becoming a private
placement market. Spreads continued to narrow. Orange County AAII Announcements
Investors should stay away from: smart notes, direct
notes, and internotes. For more information about the Orange
What about new purchases? Stick with: County chapter of AAII and their meetings, go
short bonds with low premiums, large issue size. to email@example.com.
Study the debt distribution and balance sheet.
There is a low chance of government interference. Note to Pro Forma Contributors:
A mentioned possibility was Fisher
Scientific at 6.125 percent, due July 1, 2015, and Please have your copy emailed to the
callable on July 10, 2010. These bonds are at the editor by the fifth of the month. Letters and
front of the line, said Cohen. comments are welcome. If you want to email an
Investors should know the capital structure
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