the rush report · web viewet rush review by mark rush [email protected] july 5rd 2010 preface...

The Q2 2010 Market Rush Review

By

Mark [email protected]

July 5rd 2010

Copyright © 2010 by Mark A. Rush

mailto:[email protected]

PrefaceOnce 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,




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. Past performance is not an indication of future results.


Introduction

The European sovereign debt crisis has started to unfold and this will be the event that will make or break the current economic recovery. The Keynesian mantra of “In the long run, we are all dead” is revealing to us all how this generational Ponzi scheme plays out. We are the ones currently living in the Keynesian “long run” … Keynes is indeed dead but we as his economic decedents live on to pay for those ill-conceived consequences of borrowing without any regard to repayment.

Hopefully our elected officials are following events in Greece and other debt ridden countries because I fear their fate foreshadows our economic destiny. I believe that it’s risky to fully invest in stocks at this time and I will be waiting until this November to see how things shake out before I put my savings to work.

Please feel free to drop me a line to let me know what I can change to make more articles appeal to you. Many articles are responses to questions/comments from the readers.

Regards,

Mark RushYellow Spring, West Virginia


Chapter 1The Basics

BP

As some of you may remember, I highlighted BP as an investment in past issues for its strong dividend, its discount to its peers and the fundamentals of oil. For a while BP was about 15% of my net worth. I had made a couple of comments over the years about BP, the first quote I found was “This company (BP) is probably one of the more screwed up oil companies going” and the other quote regarding doing business in the US was “I would shy away from US based oil companies”. What I have learned from this is when a company has a material discount to its peers that the risks are likely understated and just because an oil company is headquartered in another country that it’s not immune from US politics.

I have already had several people ask me about BP stock and wanted to give my thoughts. My answer is that I don’t plan to buy this stock at this time. First the spill hasn’t stopped and potentially could continue for many more months. Second this administration and Congress is hostile to business and gives them an excuse to confiscate wealth for redistribution. Third, this company small but very real chance of going out of business given the previous two items.

Now, let’s be clear on one issue, I believe that BP is clearly responsible for the disaster and should pay all “legitimate” claims to compensate people for their losses directly caused by the spill. These claims should be paid even if BP needs to go bankrupt to pay them. But I do want BP to survive this mess because I want them to be able to pay those claims, provide needed oil from within our borders, create high paying value added jobs, produce real economic activity within the US, and pay US taxes to help reduce our deficits. I suspect my definition of legitimate and the current administration’s definition of legitimate may bankrupt BP and we may lose those benefits that I just outlined.

There is absolutely no reason to rush into this stock at anytime soon. There will be plenty of time later to buy into this stock at a bargain price in a year or two; this story will take years to play out and ample time to buy later. In the future costs will be higher because BP will be ultraconservative, they will be under heavy scrutiny, and another disaster will surely bankrupt the company. Even after the spill has stopped I wouldn’t buy this stock, I would expect a fool’s rally to occur, but the cleanup and the litigation will continue to haunt this company for the foreseeable future and the shares may continue downward even after the spill has been stopped.

Fortunately for me I sold all my BP shares earlier this year because I thought oil was too high and in anticipation of changes to the dividend tax laws. Luck in this case was far better than wisdom in this case. I am currently short January $45 calls and plan to sell more when the spill has been stopped.


Social Security “The $50 Trillion Ponzi scheme”

Definition: A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned.

Definition: Social Security/Medicare is a tax that pays current recipients from current tax holder with a promise to pay subsequent taxpayers, rather than from any investments.

I am being lazy and instead of writing a 10 page rant on Social Security/Medicare I have provided a link to a slide show that provides a relatively concise summery of the problem. This is probably the most important issue regarding our long term economic health. The unfunded liabilities that we are accruing will damage everyone’s standard of living and reduce the status of the US as a world power. Please take into consideration that this slideshow was written in 2008 before the current deficits and trillions more being added to the government supported health care system.

http://perotcharts.com/challenges/

The facts that are presented in the slideshow are the simple facts of our current long-term problematic economic situation. Social Security (SS) will eventually decimate the US economic health and materially degrade the value the US dollar over the next 40 years.

Our nation spends more money than it collects already SS surpluses have been borrowed by the government and spend already The national debt is approaching a debt spiral in the next 10 years The dollar will likely fall precipitously and inflation run rampant Real wealth and income for all citizens will fall materially The Gov’t spends 20% of GDP now and by 2050 will consume 60% of GDP All taxes on everyone will need to triple just to support existing programs Those people already paying 35% or more in taxes will need to pay 100% The talented and wealthy may decide to leave the US compounding the problem There are no fixes that are politically achievable, this will occur… The SS crisis will make the housing crisis look like a runny nose

The only real way for an individual to escape this problem is to move to another country; keep in mind that US tax law dictates that you are still are required to pay US taxes as long as you are a US citizen. I assume the day will come when people will leave the US and give up their citizenship just to avoid going broke but thankfully US treasury has already thought of the problem and a solution. If you leave the US and give up your citizenship, you still owe US income taxes for the following 10 years.

Over the next 5-10 years, I believe that the implications of this phenomenon are going to be higher taxes, inflation, and interest rates with a falling dollar. Long term, I like owning real estate with a lot of debt while also holding foreign stocks and bonds. Owning long term debt/bonds denominated in US dollars is an extremely BAD IDEA


http://perotcharts.com/challenges/

http://en.wikipedia.org/wiki/Investment

http://en.wikipedia.org/wiki/Fraud

Chapter 2Indicators

It is time to review market indicators based on my “opinion” based on 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.

Economic Indicators (my opinions) US Gross National Product (GDP) Growth > +2.0 % for 2010

It seems like we are on track to get some growth this year but Europe’s problems are putting more risk into the macroeconomic situation. Current consensus estimates for US GDP growth is still 3.3% this year.

The economy seems to be stabilizing and likely to expand this year

Unemployment of falls to < 8.5% by the end of 2010

I’m still not sure what I was thinking when I made this prediction… I will be wrong!!

I hope unemployment has peaked and I am looking forward to less unemployment in the future but for now this indicator is a big negative at 9.5%. Almost everyone (including me) believes it will be several years before we get back to “normal” unemployment rates. It is possible that unemployment may have peaked. If we go above 10% again it would be a very ominous sign.


Unemployment is very high

Federal Reserve holds rates steady or raises interest rates 2010

You can’t lower interest rates lower than zero. The current problems in Europe are likely to force the Fed to hold rates low for a longer period of time. I was expecting them to raise rates toward the end of the year but with until the crisis in Europe is resolved rates will necessarily stay low. On an interesting side note, China has been raising rates and reserve requirements. They are busy trying to slow down their economy. They are also allowing the value of their currency go up.

Low rates are good for the market…

Inflation > 3.0% in 2010

The current inflation rate is around +2.0% and inflation is unlikely to show its ugly head until the economy recovers. The European sovereign debt crisis is putting a damper on demand and destroying wealth. I would expect inflation to stay tame through 2012.


Currently we are not experiencing inflation or deflation and the vast increase money supply seems to have stabilized.

Return of spending by US consumer in 2010

Foreclosures will be higher than historical for the next 2-3 years; consumer spending will take years to recover since much of the spending was financed via fictitious housing values.

There are some people theorizing that consumer spending is actually be propped up by the millions of people who are living in their house waiting to be foreclosed upon. The theory goes that the soon to be foreclosed upon people don’t need to make a rent or mortgage payment and just spend the “extra” money on consumer goods. Since it can take 12-18 months for the banks to get around to kicking them out of the bank’s house these people are inadvertently propping up spending. Once they need to start paying rent again consumer spending may fall again.

This indicator remains weak but stable

S&P profits grow by 20% in 2010

Corporations were financially stronger going into this down turn (except financial institutions) compared to other downturns but this one will be much deeper. Analyst’s expectations are around 35%, but they tend to be a bit over optimistic and I pessimistic.

I expect S&P 500 earnings growth to be up >20% from 2009

Stable (- 5%) Real Estate prices in 2010

The 30 year mortgage rate is now 4.8% near recent record lows. The current administration’s propensity to spend should put pressure on long term interest rates and inflation expectations. The Fed stopped buying mortgage securities in March and rates should eventually go up and that should push prices down for houses. But for now the debt crisis has caused a flood of money to leave Europe and slosh upon our shores. This event should help keep rates low and help support the housing market.

Housing prices are up 3.8% in the past year.

30 Year Mortgage Rates


Housing prices are stabilizing; interest rates are low

>$1,000,000,000,000.00 ($1 trillion Dollars) budget deficit for FY 2010

I have already been proven so incredibly wrong on this estimate. The administration is now projecting a $1.5 trillion deficit on top of $2.2 trillion of revenue they expect to receive.

How much money is the deficit? The government is planning to deficit spend over $5,150 per person ( about $20,600 for a family of four) on top of the $7,500 per person ($30,000 for a family of four) that it actually collects. This year’s budget actually spends more ($50,600 for a family of four) than the median US household income ($50,000). Does this bother anyone?

This massive taxing, borrowing, and spending will eventually have a catastrophic impact on interest rates, inflation, value of the dollar, and standards of living for everyone. In 1944, Friedrich Von Hayek wrote a book call “Road to Serfdom” eventually he received the Nobel Prize in economics in 1974. Everyone should read this book.

I believe thoughtless government overspending is harmful in the long run

International value of the US dollar declining >35% in next 5 years

In the long run 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.

Currently the dollar is being bought and has risen over 10% since November. I believe that it’s because in the developed world we are the ship that is sinking the slowest.


Long term bad for US investing; Good for Foreign investments

Improved Liquidity in 2010

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.

We have returned from the precipice and things are much more stable but things look like they may be set to deteriorate again (note slight uptrend in graph).

(Bond market fear index)

This indicator has improved from late 2009 but has but seems to be increasing again


Technical Indicators

Technical analysis is the attempt to forecast the future direction of prices through the study of past market data. I use Barchart ( http://www.barchart.com/ ) to come up with a final “objective” opinion of an investment. I say objective since it is a purely mathematical method to project a direction of an investment. Its primary ability (flaw) is that it tries to predict the future by interpolating from the past performance. One phrase does come to mind, “Past performance is not an indication of future results”.

Barchart changed the links to the various WebPages and I have updated those new links. I also have changed my volatility index indicators from the CBOT Volatility Index (VIX) to the stock market tradable volatility index Volatility ETF (VXX).

Model Portfolio and other technical indicators (+100% = strong buy; -100% = strong sell)

US Stock 1/3/09 3/31/09 6/31/10 Link SPY +64% +80% -100% http://www.barchart.com/opinions/etf/SPY

QQQQ +96% +80% -100% http://www.barchart.com/opinions/etf/QQQQ

IWM +88% +80% -80% http://www.barchart.com/opinions/etf/IWM

Foreign EFA +56% +64% -80% http://www.barchart.com/opinions/etf/EEM

EEM +80% +72% -80% http://www.barchart.com/opinions/etf/EEM

BondsTLT -88% -72% +100% http://www.barchart.com/opinions/etf/TLT

SHY -88% -16% +96% http://www.barchart.com/opinions/etf/SHY

Gold/Oil/Dollar Idex/Euro/Yen/GLD -8% +8% +40% http://www.barchart.com/opinions/etf/GLD

USO +48% +72% -80% http://www.barchart.com/opinions/etf/USO

UUP +72% +64% +16% http://www.barchart.com/opinions/etf/UUP

FXE -56% -72% -48% http://www.barchart.com/opinions/etf/FXE

FXY -64% -100% +88% http://www.barchart.com/opinions/etf/FXY

Volatility ETFVXX -32% -24% +80% http://www.barchart.com/opinions/etf/VXX

The Volatility ETF (VXX) (stock market fear index)

The Volatility index (VIX) can be thought of as the US stock market fear indicator and the higher it is the higher the fear in the market. Once the Greek debt crisis started to come to fruition, this index rose again. It’s clearly not back to where it was two years ago but it certainly in higher now. This is a bad sign for stocks…


http://www.barchart.com/opinions/etf/VXX

http://www.barchart.com/opinions/etf/FXY

http://www.barchart.com/opinions/etf/FXE

http://www.barchart.com/opinions/etf/UUP

http://www.barchart.com/opinions/etf/USO

http://www.barchart.com/opinions/etf/GLD

http://www.barchart.com/opinions/etf/SHY

http://www.barchart.com/opinions/etf/TLT

http://www.barchart.com/opinions/etf/EEM

http://www.barchart.com/opinions/etf/EEM

http://www.barchart.com/opinions/etf/IWM

http://www.barchart.com/opinions/etf/QQQQ

http://www.barchart.com/opinions/etf/SPY

http://www.barchart.com/

This indicator is very bad sign for stocks. If this index got below 25 again I would consider buying stocks again. Over 50 would be very ominous.

These technical indicators have are negative for all stocks and oil while strong for owning the US dollars, Yen, gold and US Debt.

Bonus Goomy Item…

In addition to my normal indicators I also watch the ECRI Weekly Leading Indicators. I don’t have regular access to the data but wanted to include it in this quarter’s report.

A negative reading indicates increased risk for a recession.


Chapter 3The Plan

Every trader reserves the right to make a more intelligent decision today than he made yesterday. - Sheldon Natenberg

Where do we go from here?

Fear and Greed…

I am not feeling very optimist this summer on the stock market, I see the following events that will likely scare capital.

FearSovereign debt risksUS tax cuts expireHealth care reformPolitical agenda/Hostile business environmentHousing crisis continuing

On the positive side we have…

GreedSteady recovery Expanding GDP/Corporate earningsCheap stocksLow inflation Long term growth in emerging marketsStable housing pricesLow interest rates

During bubbles people are enthusiastic and they don’t want to miss out on profits (greed) and during downturns everyone is afraid they are going to lose money (fear). I believe going into 2011 fear will dominate

It looks like we are potentially entering a third phase of this borrowing crisis. The first phase was when people had too much personal/home debt that couldn’t be repaid; that caused the second phase when the banks had too much debt that they were unable to repay and now the final phase when governments have too much debt to repay. I’m not sure what the fourth phase would be like but I am sure that I don’t want to find out.

European Markets

European response to their current debt problems is to raise taxes and cut spending. The economic left are panicking about cutting spending for they believe stimulus is needed and those on the economic right are howling about the raising of taxes will


impede investment. In this case they both sides agree that this is not a good thing.

If we go there is double dip recession then it will be instigated by this European imprudence. I shall not make any new investments in Europe for the foreseeable future and I am currently short the Euro.

The economy and budget deficits

The US government is on a collision course with financial disaster. I know of no way to stopping it. I will never hold long term Bonds denominated in US Dollars nor have net investments that are tied to the US dollar. Eventually interest rates MUST GO UP, the government is going to crowd out capital to fund its spending. Eventually the most likely “band aid” will involve devaluating (either directly or indirectly) the US dollar. This is as sure as the laws of physics. We got ourselves into this current mess by individuals borrowing money they could not repay therefore our logical solution to this problem is for us to collectively borrow too much money that we can not repay? I warned my readers of the impeding housing bubble in 2006 and now I am warning them of the impending US debt spiral.

This is what is happening to our socialist leaning friends in Europe right now. The PIIGS (Portugal, Italy, Ireland, Greece, and Spain) have been using borrowed money to finance current spending. This is all well and good until people stop loaning you money. There is great quote attributed to Margret Thatcher regarding our popular economic policies “The problem with socialism is that eventually you run out of other people's money to spend." Greece has reached that point and other will soon follow.

I can’t emphasize this enough… I will not buy nor shall I ever hold US Treasuries Bonds (except for TIPS). 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 when the recovery begins. The Federal Reserve will need to eventually raise rates and this will cause the investors in bonds to lose money. Long term the vast debt that we are incurring and I can only come up with one conclusion and Greece is the showing us the way.

I am short treasuries via the TBT. This is costing me a fortune to maintain.

Muni bonds

These instruments are getting potentially very dangerous… Warren Buffet has been exiting these instruments and not will to take the risks involved with Muni bonds.

Taxes are going to go up and people are going to want to shelter income, tax free bonds are going to go up. I am thinking about buying some Muni bonds now and selling them when 2011 arrives. If you need tax free income this is one of your few options and it’s a nice place to keep short term funds in lieu of cash in the bank.

Long term these bonds will get hit with rising interest rates so the trick to Muni bonds is twofold. First, I look for bonds that aren’t likely to default. Second, I would not invest in any bonds that have a maturity no longer than 2 years. Muni bonds will have exposure to


inflation risk, state and local default and dollar risk. I own the municipal bond fund SHM

Corporate Bonds I don’t like them out more than a year or two

Corporate bonds are likely to get beat up later this year due to taxes increases next year. I plan to avoid them until 2011 and then buy some in my IRA. Another factor to consider is if inflation starts to appear bonds do horribly during inflationary time and I suspect inflation will appear in the next couple of years.

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 but this idea isn’t very viable without a significant amount of cheap leverage.

Financial stocks

I still think that it still is too risky… I was tempted by Goldman Sachs (GS) and I bought a very small position. I will be buying more over the next year. Gold

I fundamentally don’t like holding gold because it doesn’t produce any wealth, in fact, usually you generally need to pay someone to hold it for you (safety deposit box) or at least have some insurance to protect from theft. Most other investments produce some sort of economic activity and generates some revenue, while gold just sits there.

What I like about gold is that it is a reasonable store of value during times of turmoil. Also most of the easy to find gold has been already been mined and as it has become more difficult to extract each year. As third world countries become richer they tend to also want to buy some of this shinny metal. Demand for this product will continue to increase as more people around the globe are able to afford more luxury items.

I believe that gold is in the process of forming a bubble but the bubble is just beginning. I think it will likely go over 1500/oz in the next couple of years. My experience is that things to tend to go on much longer than I expect so with this mind my target $1800/oz.

I reluctantly am investing in gold and platinum while I am also considering buying some gold mining stocks for the longer term. I like mines more from a philosophical basis because at least gold mines have creates some economic activity besides storage fees.

I own physical gold and get in and out of the gold fund GLD

Inflation

I don’t expect inflation until the recovery takes hold, once unemployment starts to drop and the economic system becomes stable there are trillions of excess dollars that will need to be mopped up by the Federal Reserve. Inflations will show its head slowly at


first and then should spin up rapidly soon after that.

In times of inflation the dollar and all US dominated bonds will fall in value while stocks, commodities, gold, real estate, and all other assets will rise.

Oil/Energy

Oil will likely fall until this mess in European gets straightened out. I have sold most of my oil related stocks. With these thoughts in mind I hold small positions in the Canadian oil company Suncor (SU) that harvests oil from tar sands.

Domestic Stocks

I prefer stocks that have exposure to the emerging markets and don’t depend as much or Europe or the US. International tech companies seem to be a better play.

We are in a falling stock market and I plan to hold off buying stocks until the DJIA is below 9000. I will be buying tech and pharmaceuticals when I start buying.

Chinese and Emerging markets

I am still a believer that these markets will drive the world economy over the next 50 years. I will be investing there based upon these beliefs. I am waiting for a major pullback to buy. This and energy is where most of my money will be invested for the foreseeable future. I have small quantities of IIF and VNM and waiting to buy the FXI.

Summary of Mark(et) Economic IndicatorsGDP Growth – The economy seems to be stabilizing and likely to expand this yearUnemployment – Unemployment is very HighFederal Reserve Bias – Low rates are good for the market…Inflation – Currently we are not experiencing inflation or deflationConsumer Spending – This indicator remains weak but stableCorporate profits Growth Rate – I expect earnings growth to be up >20% this year Real Estate Market – Housing prices are stabilizing; interest rates are low Budget Deficit – DisastrousDollar – short term safe havenVolatility Index – Down from high but rising rapidly in response to Europe debt issuesTechnical Indicators – These technical indicators have are negative for all stocks and oil while strong for owning the US dollars, Yen, gold and US Debt. Liquidity – This indicator has improved significantly but is deteriorating again


So… What is the Plan?

I am holding ~60% cash and I am overall short the stock market via the double short S&P 500 (SDS). I still have small stock positions, short some treasuries, and short the Euro. I plan to wait to buy stocks until the DJIA is below 9000 but don’t believe it will go below 8000. Yes, I expect the DJIA to drop at least another 15% or so.

I still do not see myself becoming a committed investor this year but I will want wait until 2011 to see how the increase in taxes changes the market. I think by the middle of 2011 the market will create investment opportunities.

The Euro is in real trouble due to the deficits of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Again, I shall not invest in anything denominated in Euro’s for the foreseeable future. Europe could sink the recovery.

The US has demonstrated its dependency on credit and if we add in the fact that we have a growing budget/dollar 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, in the “long run”, when I begin investing again I will have no choice but to invest outside of the US, minimizing my exposure to the US dollar and especially avoiding dollar denominated US government bonds …


Chapter 4Domestic Watch List

Short term cash

Barclays Short-Term Municipal Bond ETF Symbol SHMSector Municipal BondsRisk LowReturn Very LowTime Horizon Short Term 1 -12 monthsTechnical Rating +77%Tax implications Federal Tax FreeAccount(s) Taxable accounts ONLY!!!!

This year I will instead of using SHY will be using Barclay’s Short-Term Muni Bond Fund (SHM). I expect that these types of instruments are going to get very popular once taxes go up. It currently has a 2.0% Federal tax free yield.

Precious Metals

GoldSymbol GLDSector Precious MetalRisk Moderate Return Moderate +Time Horizon Medium term (3 months – 60 months)Technical rating +40%Tax implications Long term capital gain rate of 15% does not apply to this ETF.

Long term capital gains rate for this security is 28%Account(s) IRA; short term 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. I believe that gold will be $1500 per ounce within the next few years.

Some other stocks that I will buy after the major stock market drop this fall.

Drugs: AMGN, BMY, MRK, PFETobacco: BT, MO, PM Oil/minerals: CVX, DO, FCX, RTP, SNP, OIHTech: INTCBanks: GS, RYFood: YUM


Chapter 5International Watch List

2010 Consensuses Economic Growth Forecast by CountryChina 8.6% Chile 3.5% United States 2.7% Japan 1.5%India 6.3% Thailand 3.3% Russia 2.5% Argentina 1.4%Egypt 4.5% South Africa 3.1% Canada 2.4% United Kingdom 1.3%

Indonesia 4.5% Turkey 3.0% Israel 2.4% France 1.3%Malaysia 3.9% Mexico 3.0% Pakistan 2.4% European Union 1.2%

Singapore 3.8% South Korea 2.8% Sweden 1.9% Italy 0.9%Brazil 3.8% Hong Kong 2.7% Poland 1.9% Spain -0.1%

Taiwan 3.5% Australia 2.7% Germany 1.6% Venezuela -3.4%

International Investments to watch

Market Vectors Vietnam ETFSymbol VNMSector International ETFRisk High (Speculative)Return Very HighTime Horizon Very Long term (10+ years)Technical Rating -72%Tax implications Consult tax advisor Account(s) Taxed

I have talked in the past of wanting to invest in Vietnam; the great thing about our financial market is if you wait someone will create an ETF that you want. I found this ETF and don’t know much about it but a bought a small position so that I will check on it every few months or so. My strategy is to “set it and forget it”… If it drops below $20 I will sell it if it goes above $30 I will buy more.

The timing to buy this now looks awful as do the technical’s but it’s something that I am going to keep in the back of my mind and revisit this fall.


Market Vectors Russia ETF Symbol RSXSector International ETFRisk HighReturn High+Time Horizon Long term Technical Rating -80%Tax implications Consult tax advisor Account(s) Taxed

Russia apparently understands tax policy better than the idealist in charge of U.S. tax policy. Not only does Russia have a 13 percent flat tax, but the government just announced it will eliminate the capital gains tax. As a capitalist I will tend to invest in capitalism.

Why are these “communist” (China) countries such capitalist? Because they know capitalism is the only means to achieve superior economic prowess to be a world power, poor countries do not any influence the world stage. Clearly Russia wants to maintain status as a world power and China wants to achieve that status. Capitalism is the only way to achieve that goal.

Currently I am not a buyer at this time since I expect a bear market that will cause oil to fall. This ETF has much of its assets geared toward oil and commodities. Longer term once the inflation begins this could potentially be a very good play.

IIF/IFN

India Closed End Funds (CEF)Symbol IIF/IFN IFNSector International CEF International CEFRisk High HighReturn Very High Very HighTime Horizon Long term (10+ years) Long term (10+ years)Technical Rating -56% -16%Premium (Discount) (10.2%) (9.2%)Tax implications Consult tax advisor Consult tax advisorAccount(s) Taxed/IRA Taxed/IRA

I am back to 2 of my old favorites closed end funds. They seem to be a little less volatile these days and since the country was already screwed up by its Marxist leanings the economic crisis is having less of an impact them than other more developed countries. I won’t forget for a moment that if the world equity markets gets hammered this CEF will drop like a rock. 20 years from now India will be an economic power house on par with the US.

Just a reminder that a CEF is a like a mutual fund but trades as a stock. Due to this fact a CEF can trade to a premium or a discount to the breakup value of the fund. As always I always prefer to buy things that are discounted such as these are now.


Chapter 6Advanced Options Strategies

Taxable Dividends to Capital Gains Conversation

As we all know taxes on dividends are going up next year and more than doubling for those with higher end incomes. Also, because of the market crash many people have a large capital losses carried forward since tax laws only allow people to deduct $3000 of stock losses each year from other income. I was thinking about this issue and got an idea on how I may be able effectively convert those dividends into capital gains.

This strategy is beneficial to me because I have large tax losses that get carried forward each year and I would like to do what I can to utilize those deferred losses as fast as possible against current income. Since the price of the options factor in the current stock price, the intrinsic value, time to expiration, stock volatility, interest rates and dividends paid. Using options I could effectively own a stock without actually owning it…

Assume:There is a stock someone wants to own that has a relatively high dividend.They have a large stock losses carried forward or in a high tax bracket.They have the money available and want to invest in a particular stock or ETF.The stock has an options market that goes out a year or more and is very liquid. They would sell a put and buy a call at the same strike price and same expiration.Hold the cash value of a stock transaction in the same account until the expiry.

Why?The dividends reduce the value of the call therefore the call is cheaper than the put value.The difference between the put and call is approximately the dividends to expiration.No actual dividends are received but they are used to factor in the price of the option.The value of the dividend is actually delivered up front as part of the options payments.If these options expire after a year then all benefits are treated as long term gainYou will also collect interest (taxed at normal income rate) on the money held in account

Risks:Poor discipline, you may be tempted to use cash reserves for other purposeComprehension risk, this is too complicated for the typical/passive investorMargin risks, without sufficient cash reserves you could get a margin call or liquatedNo guarantee that you the stock will go up, if stock goes down you lose valueThis strategy will be difficult to get out of cleanly on short notice.Execution risk, very diligent execution will be required to make this workFriction risk, expensive to get into and out of due to large bid ask spreads and broker feesExercise risk, I need to remember to execute before expiry or risk significant value lossTax risk, I’m not sure if the IRS would agree with my view on this idea

Benefits:No dividend income, all gains/losses are taxed as capital gainsEquivalent dividends are paid up front and not taxed until options are liquated


http://www.investopedia.com/terms/c/cashdividend.asp

http://www.investopedia.com/terms/i/interestrate.asp

http://www.investopedia.com/terms/v/volatility.asp

http://www.investopedia.com/terms/e/expirationdate.asp

http://www.investopedia.com/terms/i/intrinsicvalue.asp

http://www.investopedia.com/articles/optioninvestor/07/options_beat_market.asp

If I were to buy a call and sell a put at the same strike price I would have little to no out of pocket expense but I have a very large leveraged (dangerous) position. It is very important for me to hold “in cash” a total amount of money equal to the put strike price multiplied by the number of shares for each and every share. To avoid unintentional leverage, the cash reserves must not be shared by other investments/strategies.

Example: I chose Phillip Morris (MO) for its high dividend in this example.When I checked the market this stock was at 19.78 and I was interested in the January 2012 options with a $20 strike. The January 2012 $20 put could be sold for $3.50/share and the same strike/expiry call could be bought for $1.70. Selling the put and buying the call nets me $1.80 ($3.50-$1.70) and that premium is received immediately.

The expected dividend for MO is $2.10 over the next 18 months. I must also factor in the fact that the put is $.22 in the money at the time of sale so after taking out this $.22 this gives only gives me a net proceeds of $1.58 vs. the expected dividend of $2.10/share. At first glance, it looks like you get ripped off for $.52/share

On the face of it this does not seem like a good deal but we also need to look at that I effectively own the stock without a cash outlay. I need to figure in the interest that I would collect on the $1.58 that I received and the $19.78 that I didn’t pay to effectually own the stock. Using an interest rate of 1.6% APR for 18 months on $21.36 gives you about $.52/share, how bizarre. It’s almost like the market is efficient!

For each 100 share block (options only trade in 100 share blocks) I would need to keep $2000 in the same account as the options because of the $20 strike. In January 2012 if the price dropped you be obligated to buy the shares for $20 (unless you buy the option back before expiry). If the stock goes up you have the option of buying the stock at $20/share or selling the option. Tax consequences (options bought before expiry):

Stock drops below $18.20 I would incur more capital lossesIf the stock was at $10 on expiry, I buy the options back for a loss of $8.20/shareI could use this loss to offset other gains or more losses carried forward

Stock closes above $18.20 you would incur a net capital gainIf the stock closes at $30 I would get net capital gains of $11.80/share In my situation, I wouldn’t pay any taxes and it reduce my losses carried forwardI pay marginal tax rate on the interest I made on the $20 held in cash

If I were to just own the stock, this year I would pay income tax at 15% on the dividends and next year I would pay taxes on dividends at the marginal income tax rate. As the stock rose or fell I wouldn’t have a gain or loss until the stock is sold.

Options are not taxed right away if they were used to buy a stock. If I write a put and gets exercised or buy a call and use it to buy a stock then the option premium is used to adjust the cost basis of underlying stock. The money received from the options isn’t taxed in this case until he stock is sold. If the option is closed via transaction then it taxed like a regular stock transaction.


Chapter 7Mark’s Model ETF Portfolio

Asset reallocation

Composition for portfolios risk profile

InvestmentRisk

Adverse Balanced Growth AggressiveUS Large Cap: 20% 30% 40% 30%US Small Cap: 10% 10% 20% 30%International: 10% 20% 30% 40%Fixed Income: 50% 35% 10% 0%Cash: 10% 5% 0% 0%

Composition of each investment type

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%


Year to Date Returns

NameSymbol 12/31/09

Price6/30/10 Price

YTD Gain %w/o Div

YTD Gain % w/ Div

SPDR S&P Depository Receipts SPY $111.44 $103.22 -7.38% -6.90%NASDAQ 100 Trust Shares QQQQ $45.75 $42.71 -6.64% -6.34%DIAMONDS Trust DIA $104.07 $97.73 -6.09% -5.20%Vanguard Value VIPERs VTV $47.75 $44.64 -6.51% -5.30%iShares Russell 2000 Index IWM $62.44 $61.12 -2.11% -1.84%iShares MSCI “EAFA” EFA $55.28 $46.51 -15.86% -15.86%iShares MSCI Emerging Markets EEM $41.50 $37.32 -10.07% -10.07%iShares Lehman 20+ Year Treasury TLT $89.89 $101.75 13.19% 14.97%iShares Lehman 7-10 Year Treasury IEF $88.60 $95.67 7.98% 9.45%iShares Lehman Aggregate Bond AGG $103.19 $107.25 3.93% 5.49%iShares GS $ InvesTop Corp LQD $104.15 $108.46 4.14% 6.31%iShares Lehman 1-3 Year Treasury SHY $82.96 $84.12 1.40% 1.87%

Results for the various “autopilot” portfolios

Risk Adverse Balanced Growth Aggressive

YTD ’10 Return 2.05% -1.30% -5.73% -7.52%’09 Return 11.14% 19.65% 31.48% 36.54%

’08 Return -8.18% -18.66% -33.90% -39.60%’07 Return 7.82% 9.40% 10.04% 10.45%’06 Return 9.72% 13.63% 19.09% 21.83%’05 Return 5.49% 7.55% 9.73% 11.77%

Total since inception 29.96% 28.43% 17.81% 14.70%

Bonds were a clear winner this time around. In my personal portfolio I am short bonds and lost money in that category. International stocks got hit hard along with US stocks.


Chapter 8Final Thoughts

The Good

Interest rates are low Asia’s economy seems robust and growth is real World GDP is projected to be positive in 2010 New innovations and new efficiencies are creating new wealth daily

The Bad

High US unemployment Higher taxes in 2011 on capital/production Government diverting resources from production and giving it to nonproduction Health care reform (more taxes on production more resources to consumption) Hostile business environment Housing crisis not over; large segment of population with mortgages and no jobs Political class that believes that redistribution of wealth is a means of creating it

The Ugly

The European debt spiral has begun with some sovereign debt now rated as junk Exploding US budget deficit/national debt with risk of debt spiral

Potential for US bonds may be downgraded California and other state/local governments debt situation

The US Social Security time bomb Looming long term devaluation of the US dollar

Final thoughts:

I reluctantly condoned of the risky action that the Federal Reserve has taken with monetary policy since these actions has probably saved the credit market from a total collapse but I do not approve of the current spending philosophies or the expansion of government or other foolishness of our government. I believe that these philosophies and general contempt for capital are making things worst and are prolonging the recession.

We are seeing in Europe what eventually happens when a society borrows and spends more than it can produce, we got a taste of that in the housing market but homeowner and banks were bailed out by the government… The EU is bailing out Greece it’s only a matter of time before the same events that are occurring in Europe occur here in the US, except no one is going to be able to be able to come to the rescue of the US Treasury. Dollar devaluation will be the only viable solution to the forthcoming US debt crisis.

I hate all bonds especially US Government Bonds for the long term! I am currently short bonds by owning the double reverse bond ETF TBT. It was my investment pick of the


year and has performed dreadfully. As the Greek debt situation materialized; people rushed into US bonds causing the bonds to run up and loosing me a lot of money. In essence people have abandoned a sinking Greek sailboat to come aboard the relatively dry USS Titanic. I have reduced my position so I can try again another day. This strategy will not likely work this year and my idea should be put on hold until at least 2011.

I don’t like investing in stocks at this point… We may be on the verge of a double dip recession fueled by European debt crisis and Chinese housing market bubble bursting.Right now everyone around the world is running scared and buying dollars and gold. Gold is a truly silly item to investment in for a modern economy but for now it is working. I will continue to hold dollars and gold assuming that “safety” herd mentality to survive until sometime next year. Gold may go over $1500/oz by next year this time. Longer term, investment in tangible income producing items will be the only way to conserve capital.

I now own a home with a 30 year fixed mortgage and shall not buy a home in Baltimore. I haven’t own a home in 7 years and forgot how much time and money one of these things are but I am happy with my little log home in the mountains of West Virginia.

I have much more to say but many of my musing are going to have to wait for another day, luckily we can always thank the politicians and the markets for always giving me something new to write about.

This is the conclusion of my report, I hope to get the next report out by October 3rd, 2010 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,




the rush report · web viewet rush review by mark rush [email protected] july 5rd 2010 preface...

Documents