Bob Carlson

Data provide interesting elements to the debate about buy-and-hold investing. The interesting data are the effects of missing the market’s best and worst days. When you decide not to take a buy-and-hold approach, you have the potential benefit of being out of the market on its worst days. You also take the new risk of being out of the market on its best days. Which is better over the long term? Is it better to miss the worst days, even if it means missing some of all of the best days? Or is is better to benefit from the best days, even if it means incurring some of the worst days? What’s clear from the data is the stock market is volatile, and most of the market’s gains and losses each year are packed into a very few days. This chart shows missing only the best five days of the market so far in 2011 would dramatically reduce your returns. In fact you’d be about break-even for the year if you miss only the best five days. But the benefits from missing the five worst days so far in 2011 is even more dramatic. Your return would be dramatically above the buy-and-hold investor, and the ride would be much smoother. I think the data support one of our main principles at Retirement Watch, it’s best to avoid large losses in your investments. The gains will take care of themselves if you reduce risks when there’s the potential for big losses.

Fears of inflation are making headlines these days. The Federal Reserve’s monetary policy followed by sharp rises in commodity prices increase expectations of future inflation. It’s important to understand the difference between a price increase caused by a change in the demand and supply balance from a price increase caused by a decline in the value of currency or its perceived value.

Consider this article about rising coffee prices.

Kraft, based in Northfield, Illinois, increased U.S. prices on Maxwell House and Yuban ground coffees by about 22 percent on March 16, spokeswoman Bridget MacConnell said. Orrville, Ohio- based Smucker, maker of Folgers coffee, raised them by 10 percent in February, Vincent Byrd, director and president of U.S. retail coffee, said on a conference call that month.

Global food costs tracked by the United Nations reached an all-time high in February and the World Bank says that contributed to 44 million more people being driven into poverty in the past year. Inflation is accelerating worldwide, spurring central banks from China to the euro region to increase interest rates, potentially curbing consumer spending.

The rise in coffee prices described in the article clearly are at least primarily the result of changes in supply. Weather patterns caused crop damage and reduced output. There also are forecasts that a new weather pattern will further reduce supply over the next year. Higher coffee prices likely aren’t caused by loose monetary policy. Likewise, at least part of the rise in oil prices is due to political unrest causing uncertainty about future supplies.

It’s not always clear when a price increase is part of a general inflationary increase. Demand for many commodities increased over the last couple of years as the global economy rebounded from the financial crisis. But at least some of this increased demand resulted from stimulus provided by global central banks and governments. The U.S. central bank made it clear that it wants inflation to increase, and it’s been successful in that.

Not all prices increases are part of a general inflation. That’s why I don’t join those who believe inflation is on a steady upward rise from here. I believe a number of the price increases we’ve seen either are temporary or are one-time increases to a new level. The latter prices will be stable at their new levels. With unused capacity in the U.S. and central banks other than the Federal Reserve tightening, inflation likely will hit a peak in coming months.

Part of your regular reading should be the quarterly reports from Hoisington Investment Management. Written by Van Hoisington and Lacy Hunt, they use charts and plain English to give a crisp, clear view of the economy and markets. The duo manages Wasatch-Hoisington U.S. Treasury fund. Even if you don’t agree with them, you should be reading their reports. For some time they’ve been recommending long-term treasury bonds. They believe that the deleveraging/disinflationary trends will continue for a while. They’ve been strong critics of quantitative easing and believe any positive effects will be temporary and will disrupt the economy in the long term. Their latest report doesn’t disappoint:

The combination of a rise in interest rates, stock prices, and food and fuel commodity prices has reduced disposable personal income, depressed the net worth of the average American family as home prices have fallen, and caused consumption to slow, increasing the income divide between the higher and lower income categories.

Here’s their view of what will happen after QE 2 ends:

While the economy will slow initially, the drop in inflation over time should lift real income and serve to stabilize the economy. The dollar should firm, encouraging foreign investors to place additional funds in U.S. markets. Taken together, these factors should give the economy the opportunity to stand on its own, rather than rely on massive governmental interventions whose potentially negative and unintended consequences are unknown.

The evidence of the past three years seems clear in that monetary and fiscal policy have been unable to improve the average American’s standard of living. Time will be required to reestablish balance sheets to more normal levels, and in the interim disinflationary/deflationary tendencies will be ascendant. This environment is favorable for holders of long dated Treasuries. Positioning for an inflation boom will prove to be disappointing.

The latest housing price data are out, and they’re not attractive. It’s clear now that the boost in the real estate market in 2009 and 2010 was due mostly to incentives such as the home buyer’s tax credit. Foreclosures continue to rise and will do so for some time. We likely are at least a year away from a bottom, much less a recovery, in home prices in most areas of the country. Unemployment has to decline to increase the demand for housing. While businesses have their firing rates down to normal levels, the hiring rate still is well below average and is around the crisis lows. Here’s a summary of the latest data from Bloomberg:

April 26 (Bloomberg) — Residential real-estate prices dropped in the 12 months to February by the most in more than a year, putting the market on the verge of eclipsing the nadir reached during the U.S. recession.

The S&P/Case-Shiller index of property values in 20 cities fell 3.3 percent from February 2010, the biggest year-over-year decline since November 2009, the group said today in New York. At 139.27, the gauge was just shy of the six-year low of 139.26 in April 2009, two months before the economic slump ended.

Values will probably keep falling as foreclosures swell the supply of unsold homes, which means the construction industry will take time to recover. Another report showed consumer confidence climbed more than forecast this month, making it more likely that spending will keep growing as the economic expansion creates jobs and stock prices advance.

There’s plenty to do in the post-career years. You don’t have to restrict your retirement activities to golf, tennis, travel, and just hanging around. You also don’t have to take my word for it. Roy Rowan, a former editor at Time Inc., has a new book in which the 91-year-old describes all the activities he’s done since retiring many years ago. Here’s a passage from a review at Fortune.com:

The marvelous course of Never Too Late winds back and forth between primer and memoir. The primer part offers lessons for living a fruitful, exciting life in the post-retirement years. Rowan’s main message is to maintain a kind of aerobic high by staying extremely busy. For him, life is all about passion, and he advocates finding something you simply adore doing as your ticket to retirement express, even if it’s far removed from the job you recently left. “Learn to play a musical instrument, master a foreign language, take up sketching or painting, or enroll in a course in gourmet cooking,” intones Rowan.

PIMCO made many headlines recently by announcing that its Total Return fund no longer owned U.S. Treasury bonds. Manager Bill Gross said the bonds offer no value. Their yields are low, less than PIMCO’s anticipated inflation rate, and the prospect is for the rates to rise. Jeff Gundlach of DoubleLine Funds largely agrees, saying that treasuries are not a good place for your money right now. But other investors disagree. They think the announcement that these two heavyweights are out of the treasury market is a good reason to buy some. You can see a good review of the argument in Barron’s here (subscription might be required) and in Bloomberg.com. For an argument not used by too many people, consider this post from John Hussman. A good review of reasons to be wary about treasuries and the dollar is here, from Allan Sloan in Fortune.

So if the U.S. defaulting on its debt isn’t a problem, what is? The same problem I’ve been writing about for years — that even when you’re the U.S. government borrowing in its own currency, there are consequences to excessive debt. Unless the U.S. defaults on its obligations, interest costs get higher and higher, putting pressure on the budget. Borrowing all this money from all over the world — foreigners own about half our publicly-traded Treasury securities — puts downward pressure on our currency’s value. No one knows for sure, but it’s possible that this is a factor in the price increases of gold, oil, and other “hard assets” in terms of dollars.

Silver, through iShares Silver Trust, has been in our Invest with the Winners-ETFs portfolio for a few months now, and it’s been in and out since last fall. It’s been a wild, profitable ride. I’ve been saying that there aren’t fundamentals to justify this rise in silver, but because IWW is an automatic trading system it will stay in the portfolio until a sell signal is triggered. A thorough report of just how overvalued silver is by a range of measures was put together by Bespoke Investment Group. A sample of their findings:

The two main silver ETFs (SLV and DBS) have gone absolutely parabolic over the past few weeks.  Both are currently trading more than two standard deviations above their 50-day moving averages, and just when they seem about as overbought as they can possibly get, they get even more overbought.

Car shoppers who don’t know the ropes could end up paying more for the car, and especially its financing, than they realize or have to. Forbes has an article revealing what it calls 10 car dealer scams to watch out for.

Four out of five car buyers finance their vehicle through the dealership, and odds are they’re paying too much, says Mukesh Chatter, chief executive of MoneyAisle.com, an online auction site for auto loans. “A mark-up of 2% to 4% is standard in the auto industry,” he says, and can be even higher for those with less than perfect credit. If you already got rooked on your car loan, you can refinance online at sites like MoneyAisle.com or bankrate.com.

Public pension plans make a lot of headlines these days because of their big deficits. Different funds have different reasons for being underfunded. Here’s the story of an interesting one, a policy officers’ retirement fund in Louisiana. It seems the officers and retired officers running the fund decided to invest in a golf course, and they spent a lot of time playing the course. They visited others on the pension fund’s dime. They had to conduct due diligence, you know.

The deal came together behind the doors of a Louisiana psychiatric ward. John Skannal, 74, signed a document in October 2003 authorizing the sale of land handed down through eight generations of his family.

The buyer was a statewide pension plan for municipal law officers. The fund assembled golf and real estate holdings that lost 84 cents on each dollar the police spent on them over 10 years. The losses are emblematic of a decade in which the $1.2 billion program went from fully funded to $836.3 million short of meeting future retirement obligations.

Sometimes readers ask about selling the U.S. stock market short and why I never include in my portfolios one of the funds that regularly sells short a stock index. The reasons are that selling short is difficult, and I haven’t found a fund that does the job well. There are technical reasons why it’s difficult to steadily have futures contracts in a mutual fund that try to track an index. The bottom line is none of the funds perform well. A new study from Morningstar and reported by Bloomberg makes the point. Only the PIMCO fund, which uses bond investments along with derivatives that sell short an index, has a positive return in the last five years and is the only bear fund to have a higher return than U.S. stock indexes.

Bear funds have failed to profit from two crashes in a decade, the second of which, from 2007 to 2009, erased $11 trillion in market value and left the Standard & Poor’s 500 Index below where it stood 11 years ago. After surging a record 30 percent in 2008, the funds slumped 34 percent in 2009 and 24 percent the following year as the stock market rebounded, according to Morningstar, which is based in Chicago.

U.S. mutual funds that short, or wager on a decline in stock markets, have on average tumbled at an annual rate of 10 percent over the 10 years through March, the most of 90 strategies tracked by Morningstar. They’ve fallen 13 percent over the past five years. The group includes 42 funds, with active as well as passive strategies, some of which attempt to amplify market gains or losses.