Bear Market Update

2007-2009 Bear Market Statistics 02/27/09

All three major indexes are now officially 50% or more off their peak values made in 2007. This chart appears to include dividends reinvested to calculate how far the markets are down. The raw data below this graph uses actual trading data to calculate raw index returns, before dividends. No matter how you slice it, the bear market has been brutal to stock market investors.


S&P500 Chart

Last Market High 10/11/07 at 1,576.09
Last Market low 02/27/09 at 734.52
Current S&P500 Price 735.09
Decline in Points = 841.00
Decline in percent = 53.4%
Max Decline = 53.4%

• =>This means the decline from intraday high to intraday low is 53.4% and we are currently 53.4% off the peak.

• =>The decline in the S&P500 from the closing high to the closing low was 53.0%

DJIA Charts

Last Market High 10/11/07 at 14,279.96
Last Market Low 02/27/09 at 7,033.62
Current DJIA Price 7,062.93
Decline in Points = 7,217.03
Decline in percent = 50.5%
Max Decline = 50.7%

• =>This means the decline from high to low has been 50.7% and we are currently 50.5% off the peak.
  
  
• =>The decline in the DOW off the closing high to the closing low was 50.1%

NASDAQ Charts

Last Market High 10/31/07 at 2,861.51
Last Market Low 11/21/08 at 1,295.35
Current NASDAQ Price 1,377.84
Decline in Points = 1,483.67
Decline in percent = 51.8%
Max Decline = 54.7%

• =>This means the decline from intraday high to intraday low is 54.7% and we are currently 51.8% off the peak.

• =>The decline in the NASDAQ off the closing high to the closing low was 54.0%

S&P 500^GSPC

DOW JONES INDU ^DJI

NASDAQ COMPOSITE ^IXIC

Bill Gross Declares The Death of Equities

Bill Gross, the manager of the monster "PIMCO Total Return" bond fund declared the death of equities according to Peter Cohan.

Cohan wrote:

Stocks are dead for the rest of your life. That's the gist of my exclusive interview with the head of PIMCO Total Return -- the biggest bond fund you've never heard of...

Gross shared his economic outlook with me yesterday in an exclusive interview -- and he's not optimistic...

Gross saw the interview and e-mailed me. I replied by telling him that I had some questions about PIMCO and his views on economic prospects. I found his answers informative and insightful and he agreed to let me post on his economic outlook which is very grim for those who believe that stocks outperform bonds. In Gross's view, the current economic contraction is killing the animal spirits that drive risk taking and that's contributing to the death of equity capitalism as we've come to know it.

and..

And in Gross's view, growth prospects are so dim that there is no point in owning stocks since common stock investors will not benefit when there's no economic growth. Moreover, they'll be last in line for any dividends that might be available.

April 21, 2010 update: As it turns out, the S&P500 has nearly doubled off the bottom in the year since Bill Gross called for the "death of equities." Click the chart below to see the S&P500 between January 2009 and today.

In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%
As of 4/20/10, the explore portfolio is up 10.3% YTD
FREE SAMPLE

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 159% (a double plus another 59%!!) vs. the S&P500 UP a tiny 8.6% vs. NASDAQ UP a tiny 3.5% (All through 12/31/09)

Subscribe NOW and get the CURRENT Issue for FREE! !
(Your 1 year, 12 issue subscription will start with next month's issue. Just mention this article)

click for full size image courtesy of stockcharts.com

FDIC List of Banks in Danger of Failure Soars 47%

Today the chairwoman of the FDIC, Sheila Bair, said the "Problem List" of troubled banks currently includes 252 banks with assets of $159B. This is up 47% from the third quarter of 2008 when the list stood at 171 banks.

She said this is one of the most difficult periods in the FDIC's 75 year history of operation.

In 2008 there were 292 bank mergers, 25 bank failures, 5 FDIC "assistance transactions." The 25 bank failures was the largest number since 1993.

There are now a total of 8,305 FDIC insured banks and savings and loans.

The banking industry lost $26.2 Billion in the fourth quarter of 2008. Worst since 1990.

Full year net income was down 84% to $16.1B, also the lowest since 1990.

FDIC reserve for bank failures fell by $16B and now stands at $19B.

The FDIC may ask for a special assessment on the industry banks to recharge their reserves.

The good news was Domestic Deposits Increased by 3.8 Percent

"Public confidence in the banking system and deposit insurance is demonstrated by the increase in domestic deposits during the fourth quarter," FDIC Chairman Sheila Bair said. "Clearly, people see an FDIC-insured account as a safe haven for their money in difficult times."

Problem List: The FDIC does not make its list of member institutions in danger of failing public because it does not want to contribute to a "run on the bank" by concerned depositors. One indication a bank may be on the list is they pay very high CD rates in an attempt to attract capital. Richard (Dick) Bove of Landenburg Thalmann has a methodology for estimating what banks are in trouble.

See Dick Bove's List of Banks In Danger of Failing

IndyMac Bankcorp was at the top of Bove's list before it failed based on non performing assets as a percentage of equity.

==> Very Best CD Rates with FDIC <==

The top rates for CDs this week are at Pentagon Federal Credit Union (fondly known as PenFed CU) for 5 and 7-year certificates of deposit that currently pay 4.39% APY.

For shorter term, Corus Bank has a 1-year CD with a 2.93% annual percentage rate.

For online savings, GMAC Bank is paying 2.75% on any deposit over $500.

With rates so low, banks will try to sell you their annuity products. Make sure you read our article "Beware of Annuities."

The table below shows the best CD rates for other terms. If that table is hard to read, then try Very Best CD Rates.

"Highest CD Rate Survey + Current US Treasury Rates"

Term	Date	Highest Rate (APY)	Where? (Click link for Full Rate Sheets)
Daily Savings	2/24/09	1.21%	Vanguard Prime Money Market Fund
Tax Exempt	2/24/09	0.77%	Vanguard Tax Exempt Money Market Fund
Online Savings	2/24/09	2.75%	GMAC Bank & 2.25% @ HSBC Bank
3-Month Treasury	2/24/09	0.30%	US Treasury Rates at a glance
6 Months	2/24/09	2.60%	GMAC Bank
6-Month Treasury	2/24/09	0.50%	US Treasury Rates at a glance
9 Months	2/24/09	2.75%	GMAC Bank
1 Year	2/24/09	2.93%	Corus Bank 2.90% @ GMAC Bank
1 Year Treasury	2/24/09	0.70%	US Treasury Rates at a glance
18 Months	2/24/09	2.90%	Intervest Bank & UmbrellaBank
2 Years	2/24/09	3.00%	UmbrellaBank & 2.95% @ GMAC Bank
2 Year Treasury	2/24/09	0.98%	US Treasury Rates at a glance
3 Years	2/24/09	3.40%	Flagstar Bank
3-Yr Treasury	2/24/09	1.37%	US Treasury Rates at a glance
4 Years	2/24/09	4.15%	PenFed Credit Union
5 Years	2/24/09	4.39%	Pentagon Federal CU
5 Yr Treasury	2/24/09	1.89%	US Treasury Rates at a glance
7 Years	2/24/09	4.39%	Pentagon Federal CU & 3.50% @ Discover Bank
10 Yr Treasury	2/24/09	2.80%	US Treasury Rates at a glance
10 Years	2/24/09	3.50%	Discover Bank
30 Yr Treasury	2/24/09	3.50%	US Treasury Rates at a glance

• Easy to Read Best CD Rate Survey
  
  
• US Treasury Rates at a Glance
  
  
• World Stock Markets at a Glance

With rates so low, banks will try to sell you their annuity products. Make sure you read our article: Beware of Annuities

(FDIC Feb. 26, 2009 Press Release)

Dow to Gold Ratio Chart Continues Plunge: DJIA Priced in Ounces of GOLD

Here is a chart showing the current Dow to Gold Ratio, the ratio of the price of the 30 stocks in the Dow Jones Industrial Average to the price of gold. When measured in ounces of Gold, the DOW has been in a secular bear market since peaking in late 1999.

Click chart courtesy of stockcharts.com for full size image

The markets, measured by the S&P500 (S&P500 Charts) and DIJA (DJIA Charts), may have recovered to new highs in 2007, but the DOW:Gold ratio told a different, truer story of just how unhealthy the US economy was.

• Back in 1999, it took 45 ounces of gold to buy the DJIA.
  
  
• Yesterday it only took 7.58 ounces of gold to buy the DOW!

The scary part is the DJIA-to-Gold ratio got down near 1 in the early 1980s and was just under 0.2 in the early 1800s.

The DOW/Gold ratio broke out of the "symmetrical triangle" pattern, explained below, when we entered our first recession and the markets were in the March 2000 to October 2002 bear market.

The good news is the chart shows the DOW:Gold ratio is very over sold.

This 200 Year Dow/Gold Chart courtesy of www.sharelynx.com (Click for full size image) shows the DOW/Gold ratio from 1800 through August 2008.


With the DOW:Gold ratio now at 7.58, it is trading below the green zone in the second chart. The ratio is oversold, but nothing says it can't get more "oversold."

CDs have been a "safe haven" for those wishing to preserve assets and get a small inflation adjusted return. See "Very Best CD Rates with FDIC" for a list of the best rates and terms.

US Treasury rates are so low, that they are paying less than long term inflation. See:

• US Treasury Rates at a Glance
  
  
• LIBOR Rates at a Glance

More on "Symetrical Triangle" chart patterns: The Bible for technical analysis, Technical Analysis of Stock Trends, by Robert Edwards and John Magee, says about 75% of symmetrical triangles are continuation patterns and the rest mark reversals. This book makes a great Gift!

The "return to the apex" of the Gold/DOW ratio in late 2001, early 2002 confirmed the technical breakdown of this chart pattern.

Graph: Consumer Confidence Index Hits Record Low

Yesterday, the Conference Board, a private not-for-profit organization research consortium in New York, said its monthly "Consumer Confidence index" sank to 25 in February. This reading of 25 is a record low level since the measure was first taken in 1967. This graph, courtesy of Martin Capital, shows consumer confidence plotted for the last 30 years has plunged to new territory.

Lynn Franco, Director of The Conference Board Consumer Research Center, said in a press release:

"The Consumer Confidence Index™, which was relatively flat in January, reached yet another all-time low in February (Index began in 1967). The decline in the Present Situation Index, driven by worsening business conditions and a rapidly deteriorating job market, suggests that overall economic conditions have weakened even further this quarter. Looking ahead, increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever. In addition, inflation expectations, which had been easing over the past several months, have moderately picked up. All in all, not only do consumers feel overall economic conditions have grown more dire, but just as disconcerting, they anticipate no improvement in conditions over the next six months."

Related Information:

• Consumer Confidence Index
  
  
• Consumer Sentiment Index
  

• ECRI: US-WLI & US-FIG

Fed Chairman Bernanke Said Recession Should End This Year

In his prepared remarks today, Federal Reserve chairman Ben Bernanke said the recession should end this year. Bernanke said this will require restoring financial stability. Bernanke said this during his "Semiannual Monetary Policy Report to the Congress" given before the "Committee on Banking, Housing and Urban Affairs" in the U.S. Senate in Washington, D.C. It was broadcast mostly live on CNBC. Bernanke said:

"The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half."

Bernanke said we need fiscal stimulus:

"To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets."

Bernanke said the recession could end in 2009 with 2010 a recovery year:

"If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

but he expects a FULL RECOVERY to take more than two years:

"The central tendency for the participants' estimates of the longer-run growth rate of real GDP is 2-1/2 percent to 2-3/4 percent; the central tendency for the longer-run rate of unemployment is 4-3/4 percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1-3/4 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run. These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years."

Read the Full Text of Bernanke's Testimony here.

During the Q&A, my favorite line was Bernanke explaining why we should help others having trouble paying their mortgages, a policy that "rewards bad behavior."

"I fully understand the sentiment. A lot of this goes against American values of self reliance and responsibility... I would give the following example. If your neighbor smokes in bed and sets his house a fire. And you live in a neighborhood of closely packed wooden houses. You could punish him very severely by refusing to send the fire department and then he would probably learn his lesson about smoking in bed. But, unfortunately, in the process you would have the entire neighborhood burning down. "

The question was partially in response to Rick Santelli's "Chicago Tea Party in July" Rant video that led to a flood of letters to congress protesting efforts to reduce what people owe who signed legal contracts with banks, often after lying about their income to qualify for the mortgage.

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Rick Santelli's "Chicago Tea Party in July" Rant of the Year

This rant by Rick Santelli on CNBC was great! It could launch his political career .
----------------------------------------------
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• Rick asks if we should reward people who carry the water rather than drink the water?

• "How many people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills? Raise your hand! "
  
  
• "We're thinking of having a Chicago tea party in July!"
  
  
• "The government should spend a trillion dollars an hour so we get 1.5 trillion back!"
  

Quote from the CBOE trading floor:

The reason this has hit such a nerve with so many is that the light bulb finally came on for millions: this whole game is about redistribution of wealth. First to the pigmen, then out of the pockets of the collapsing middle class and into the black hole of social welfare. It's about the disenfranchisement of the posterity of our formerly Constitutional republic.

Revolution time is almost here. Thanks, Rick.

From CNBC:

RICK SANTELLI: CNBC On-Air Editor

Rick Santelli joined CNBC Business News as on-air editor in June 1999, reporting live from the floor of the Chicago Board of Trade. His focus is primarily on interest rates, foreign exchange, and the Federal Reserve.

A veteran trader and financial executive, Santelli has provided live reports on the markets in print and on local and national radio and television. He joined CNBC from the Institutional Financial Futures and Options at Sanwa Futures, L.L.C. There, he was a vice president handling institutional trading and hedge accounts for a variety of futures related products.

Prior to that, Santelli worked as vice president of Institutional Futures and Options at Rand Financial Services, Inc., served as managing director at the Derivative Products Group of Geldermann, Inc., and was Vice President in charge of Interest Rate Futures and Options at the Chicago Board of Trade for Drexel, Burnham, Lambert. Santelli began his career in 1979 as a trader and order filler at the Chicago Mercantile Exchange in a variety of markets including gold, lumber, CD's, T-bills, foreign currencies and livestock.

He is a graduate of the University of Illinois Champaign/Urbana with a Bachelor of Science degree. Santelli has been a member of both the Chicago Mercantile Exchange and the Chicago Board of Trade.

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Elaine Garzarelli Bearish on NBR; 750 to 950 Trading Range

Elaine Garzarelli, president of Garzarelli Capital, was correctly bearish for much of this bear market. Elaine was "Nightly Business Report's (NBR) "Friday Market Monitor" for Friday the 13th, 2009. You can read her full interview here. Elaine has a PhD in economics and she correctly forecast the 1987 bear market. She got bearish in the mid 1990s then recognized her mistake and got bullish again for much of the run up. I don't have any data for what she predicted between 2000 and 2008 and would welcome a full summary in the comments section or via email.

Elaine's last visit to NBR was Friday August 1, 2008. You can read the full transcript of her last visit here.

My comments on some of what Elaine said Friday February 13, 2008:

KANGAS: Because you have a Ph.D. in economics, Elaine, who could be better to ask as to whether these massive Obama rescue plans for the economy and the banks are going to work out.

GARZARELLI: Well, I think it's a little late. I think it's more of a 2010 deal than it is 2009. In both years it will be about 2 to 3 percent of GDP. But 38 percent of it is a tax cut and consumers right now, with the unemployment rate probably getting up to 10 percent, are more likely to save than to spend that money. And the other spending has to do with infrastructure projects. A lot of it goes to state and local governments and their budgets are so bad, they're likely to keep it rather than spend it.

Elaine was bearish last year because she thought earnings estimates were too high (too bad Brinker didn't use her estimates.) Elaine thinks earnings estimates are still too high.

KANGAS: On your last visit with us in early August, you were correctly bearish on the stock market mainly because you thought corporate earnings estimates from Wall Street analysts were far too high, about 42 percent too high. How about now?

GARZARELLI: Now they're 44 percent too high.

KANGAS: Oh, boy.

GARZARELLI: Because we had to lower our estimates again from 55 to 46 for the S&P 500 operating earnings. And that's because we see a peak to trough decline in real GDP of about 4 to 4 1/2 percent, which is the worst post-World War II recession that we have ever had.

Elaine's indicators are more bearish than bullish:

KANGAS: Your 14 market indicators back in August were at the 50 mark. 30 is the sell signal, 65 a buy and so they were kind of bearish. Where do they stand now?

GARZARELLI: They're at 38 percent now and they need to go to 65 percent for a new cyclical bull market to begin. So they're still on a sell signal, still in a bear market. We might be getting near the end of it. It all depends really on credit spreads and how fast the BAA bond will come down.

Next they discussed some of her stock picks and shorts from her last visit. Her four buy recommendations were UUP (up 13.6%), BAC (down 82%), MO (down 23.8%) and SH (up 11.6%).

Lets see how she did with 25% Equal into each:

Ticker	Change	Wt	Final
BAC	(82.3%)	0.25	0.04415
UUP	14.8%	0.25	0.2869
MO	(18.8%)	0.25	0.2029
SH	30.2%	0.25	0.3256
Weighted Total			0.85955
Change			(14.0%)
S&P500			(33.8%)
Elaine's Picks Beat the market by			19.8%

Elaine's new stock picks and 750 to 950 S&P500 trading range:

KANGAS: Do you have some new recommendations, Elaine?

GARZARELLI: Yes, I do. I have some good ones. Now, I think we might be in a trading range from 750 to maybe 950 on the S&P 500, so in that range you want to un-hedge at the bottom of the range and then you want to hedge at the top end of the range or you could keep hedges on all the time, which is what I do.

Elaine's four new picks:

1. HNW: 19% yield.
2. MUA: 7.4% yield.
3. RYU: Ryder, the equal weighted utilities index
4. SDS. A double weight S&P500 short.
   

GARZARELLI: OK. The first one is (HNW) and that's 19 percent yield. And that is the--

KANGAS: Unbelievable.

GARZARELLI: That is the Pioneer high-yield income trust. Another one, municipal bonds I think are a great bargain right here. We're getting a 7.4 percent yield and that's MUA, Blackrock muni asset fund.

KANGAS: Very good.

GARZARELLI: And I also like the dividend fund which is (RYU), that's the Ryder, the equal weighted utilities index where most of it is in utilities and then telecom about 20 percent. And then the last one is the same thing I did before but it's a double weight and that's (SDS), which is a short, which gets you 75 percent hedged, 25 percent exposure to the market. That should give you a dividend of about 12 percent.

Elaine says she owns them all.

Updating Chart courtesy of MarketWatch
Click for full size Chart Image

I take it she is fully short at 950 then takes the shorts off as the market approaches 750 until her indicators give a buy signal.

NBR Trasnscripts of Elaine Garzarelli visits:

• Friday February 13, 2009
  
• Friday August 1, 2008

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Catching Wild Pigs - A President's Day Message

Happy President's Day

"A government big enough to give you everything you want, is big enough to take away everything you have."
Thomas Jefferson

This story was sent to me by my very wise Aunt Lea.

CATCHING WILD PIGS

There was a Chemistry professor in a large college that had some exchange students in the class.

One day, while the class was in the lab, the Prof. noticed one of the exchange students who kept rubbing his back and stretching as if his back hurt. The professor asked the young man what the matter was.

The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country's government and install a communist government.

In the midst of his story he looked at the professor and asked a strange question. He asked, 'Do you know how to catch wild pigs?'

The professor thought it was a joke and asked for the punch line.

The young man said this was no joke. 'You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come everyday to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again. You continue until you have all four sides of the fence up with a gate in the last side. The pigs, who are used to the free corn, start to come through the gate to eat, then you slam the gate on them and catch the whole herd.

'Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught. Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.'

The young man then told the professor that was exactly what he is seeing happening in America!

'The government keeps pushing the people toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine , drugs, etc, etc, etc. while the people continue to lose their freedom - just a little at a time. One should always remember: There is no such thing as a free Lunch ! Also, a politician will never provide a service for you cheaper than you can do it yourself.'

So, if you see that all of this wonderful government 'help' is a problem confronting the future of democracy in America , you might want to send this on to your friends. If you think the free ride is essential to your way of life then you will probably delete this email, but God help you when the gates slam shut! Listen closely to what the politicians are promising you - just maybe you will be able to tell who is about to slam the gate on America .

Have a safe holiday and remember "Ask not what the government can do for you....."

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Vanguard's GNMA versus Total Bond Fund

Vanguard has two excellent funds called "Vanguard GNMA Fund" (VFIIX Charts) and "Vanguard Total Bond Market Index Fund" (VBMFX Charts). VFIIX invests mostly in Government National Mortgage Association (”Ginnie Mae”) securities. These securities are backed by the U.S. government so they get the top Aaa rating at Moody's and AAA at Standard & Poor's. Much more diversified VBMFX invests in more than 3,000 bonds representative of the broad, U.S. investment-grade market. Investment grade means ratings are Aaa to Baa3 at Modie's and AAA to BBB- at S&P.

Both are "Investor Class Shares" which have the lowest minimum required investment of $3,000. Bob Brinker recommends the GNMA Fund on his radio show, Moneytalk (See Bob Brinker's Current GNMA Fund Advice), but Brinker seldom talks about the Total Bond fund that is preferred by most followers of modern portfolio theory (mpt) and fans of diversification.

Performance Comparison between VFIIX and VBMFX:

3 yr annual return: VFIIX=6.04%; VBMFX=5.28%
3 yr annual SD: VFIIX=3.36%; VBMFX=4.11%
10 yr annual return: VFIIX=5.68%; VBMFX= 5.68%
(per Morningstar)

where "SD" is standard deviation, a measure of volatility.

Fixed income characteristics as of 12/31/2008:

GNMA Fund Investor Shares

Yield to maturity = 3.4%
Average coupon = 5.6%
Average maturity* = 1.7 years
Average quality Aaa
Average duration** 1.0 years

Total Bond Market Index Fund Investor Shares

Yield to maturity = 4.0%
Average coupon = 5.3%
Average maturity* = 5.4years
Average quality** = AA1/AA2
Average duration*** = 3.7 years

*Yield to maturity is the rate of return an investor would receive if a security is held to its maturity date.

**Average Quality: Aaa is Moody's highest ranking. AA1 and AA2 are the next two lower ratings for high grade bonds. See Bond Ranking Table at Wikipedia.

***Duration is a measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.

The total bond fund is an index fund while the GNMA fund is not. The fund manager for the GNMA fund will adjust the fund holdings to affect duration and yield to anticipate the future direction of interest rates. This is market timing.

I own some of both funds.

For the "explore" or "mad money" part of my "core and explore portfolio," I use the GNMA fund to buy when its NAV is low due to exuberance (low fear) for stocks that drives interest rates up (and NAVs down) as money flows from fixed income to equities. If I am wrong with my "attempt" to time bonds, then I have a good fund with great yield and 100% backing by the government's ability to print money. If I am right with my timing, the fund can sometimes give more bang for the buck than Total Bond for short term moves since the fund manager adjusts duration.

The GNMA fund manager now has duration very short so I've taken profits to wait for the next low NAV time to repurchase. I'll buy the shares back when duration is longer and rates are higher, perhaps when people are euphoric about stocks again which causes money to flow from safe bonds to risky stocks.

For the core part of your portfolio, I recommend Total Bond (VBMFX) for those who want to keep it simple.

If you want "rebalance premium" from the inflation and deflation cycles, then I prefer splitting the money into TIPS, Cash/CDs/MM Funds and Total Bond to some allocation you are comfortable with THEN rebalance back to that target allocation whenever the allocation gets a set percentage out of balance.

That is keep the total bond fund in your core portfolio and use the managed GNMA fund in your explore portfolio.

The knock on GNMAs for the long term is they are essentially "callable" in that people tend to refinance when rates drop so you don't get the same NAV upside potential from falling rates. This has not been a problem the past 10 years as rates for mortgages have not fallen nearly as much as Treasury rates... On the flip-side, when rates go up, people tend to not refinance... so you don't have a symmetrical risk/reward profile.

More charts for Vanguard Fixed Income Funds:

• GNMA (VFIIX)
• Total Bond (VBMFX)
• TIPS (VIPSX)
• High-Yield/Junk Bond (VWEAX)

January 2010 Update: Last year I sold ALL my bond funds that are not indexed to inflation for my personal account. To see what I recommend these days, you need to subscribe to one of my newsletters. For details, see Kirk's Two Investment Letters

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BofA CEO Ken Lewis Maria Bartiromo Interview

Today CNBC's Maria Bartiromo interviewed Bank of America's (BAC) CEO Ken Lewis.

See Anchor Women of CNBC for more on Maria Bartiromo.

Below are some key excerpts from this interview.

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BofA took $45B of taxpayer TARP money so far.

Fundamentally, they can run the company as they want and managers can and will work for $500,000 a year until they get out of trouble, he is worried 20 to 30 others beyond top management could leave for better salaries elsewhere. Lewis hopes Obama rethinks this restriction on salaries.

On Nationalization: Worry about nationalization has BAC down nearly 90% from the top. Lewis says nobody has said to him that nationalization is the way to go. Nationalization "appears to be vicious rumors." Nobody in government or anywhere has ever talked to him about this as the way to go.


He hopes to make money and pay the taxpayers back in three years.

On Merrill Lynch purchase, he bought when he did rather than wait for it to perhaps go lower as he was worried others might step in and buy it before him.

Kirk Comment: In retrospect, it would have been good to let his competition implode with this toxic time bomb.

On walking away from Merrill Lynch deal when he had the opportunity: At the end of the day, he felt getting out of the ML deal was not in BofA's or the countries best interest. He was pressured by the Treasury, probably Hank Paulson, to go through with the deal because part of what is good for America is good for BofA in the long term.

MB: How does he justify paying out $4B in bonuses to Merrill Lynch.

This was not directly under him and he seemed to hesitate to comment on it saying there is pending litigation. Lewis said he and his direct reports requested they not take their bonuses this year. He said BofA determines 2009 bonuses for 2008 in February so they can see the end result of the past year. It sounds like ML paid their bonuses out just before the terrible results for 2008 were known.

MB: How do you keep good people at the firm.

MB: How do you reassure investors BofA has a plan?

KL: "We are going to get on with doing business." We had a pretty good January in terms of customer flows, refinancing..... trading has been better.... "we had some nice flows in January."

Good flows on debt originations. Refi boom - Countrywide on fire. Refis free up a lot of cash flow for consumers.

MB: When will you be profitable?

KL: We were profitable in 2007 and 2008. Merrill Lynch lost all that money before they were part of BofA. He avoided saying what impact of ML losses will be on 2009 earnings.

We do NOT need more money from the government. Categorically, I can say NO.

MB: What is most important change you can do to succeed in the future?

KL: We are doing it now. We downsized certain areas. We hired 3,000 people in our mortgage group.

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Disclosures: I currently have a positions in the financial exchange trade fund, XLF (Charts), in my personal portfolio and "Kirk Lindstrom's Investment Letter" explore portfolio. BAC was over 9% of XLF as of 9/30/08

"Kirk Lindstrom's Investment Letter" covers the "core and explore" approach to investing. Its portfolios are suitable for moderate to aggressive investors. FREE SAMPLE.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 94% vs. S&P500 DOWN 14% vs. NASDAQ down 28% vs. Warren Buffett's Berkshire Hathaway (BRKA) up 37% (All through 12/31/08) (More Info)

ECRI's FIG Shows Inflation Pressure at Fresh 50-Year Low

The Economic Cycle Research Institute, a New York-based independent forecasting group known as ECRI, said inflation pressure is at a 50-year low. (More about ECRI.)

Underlying inflationary pressures dropped further in January 2009, according to ECRI's U.S. Future Inflation Gauge (USFIG). The value of the USFIG lies in its ability to measure underlying inflationary pressures and thereby predict turning points in the U.S. inflation cycle.

The USFIG declined to 81.8 (1992=100) in January from 84.5 in December, while its smoothed annualized growth rate (charted below) slipped to -38.8% from -37.9%. The gauge was pulled down in January mainly by negative contributions from measures of loans, vendor performance, unemployment and job growth, partly offset by a positive contribution from a measure of commodity prices.

Commenting on the data, Lakshman Achuthan, Managing Directors ECRI said

"With the USFIG locked in a clear cyclical downswing, U.S. inflation pressures areessentially non-existent. Rather, there are continued downward pressures on U.S. consumer prices."

Click to see larger FIG Growth Rate chart

The very low US-FIG means means the Federal Reserve can keep the Fed Funds rate low since inflation pressure is still in a cyclical decline.

The Fed Funds target rate is currently a range between zero and 0.25%.

More Information:

• More about ECRI US-FIG Growth Rate
  
  
• US Treasury Rates at a Glance
  
  
• World Stock Markets at a Glance
  
  
• Libor Rates at a Glance
  
  

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DRYS: DryShips Inc. (Nasdaq)

DryShips Inc. (more DRYS charts) is a global shipping transportation company specializing in the transportation of dry bulk cargo. Their executive offices are located in Amaroussion, Greece. They are listed on the Nasdaq Exchange (since February 2005) under the symbol "DRYS." Their website says their fleet carrying capacity totals over 4 million dead weight tons.

Well known market timer, Don Wolanchuk, likes Dry Ships (DRYS on the NASDAQ exchange) as a high octane (high risk) stock to take advantage of a bull market rally he expects.

Don's recent comments about DRYS:

• Feb. 2: @ ~$5 thats one very boolish looking chart....3 gap play on the decline 2 eh...........thanks
  
• Feb 4, 2009 @~ $7: lookin at the chart im thinkin 15 to 20 will be here this month.....

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View the full DRYS chart at Wikinvest

Yahoo! Valuation Numbers for DRYS:
DryShips Inc. (NMS: DRYS)

$6.49 0.67 (9.36%) 1:33pm EThelp

Last Trade:	6.57
Trade Time:	1:19PM ET
Change:	0.59 (8.24%)
Prev Close:	7.16
Open:	7.38
Bid:	6.56 x 5800
Ask:	6.57 x 4700
1y Target Est:	22.57

Day's Range:	6.15 - 7.38
52wk Range:	3.04 - 116.43
Volume:	21,314,552
Avg Vol (3m):	19,373,800
Market Cap:	286.11M
P/E (ttm):	0.31
EPS (ttm):	21.23
Div & Yield:	0.80 (13.10%)

Beware, analysts have much lower estimates for next year. The current PE of 0.31 will rise to a PE of 5.3 if the most bearish earnings estimate for 2009 at $1.23 holds true.

Analyst Estimates

Earnings Est	Current Year Dec-08	Next Year Dec-09
Avg. Estimate	11.45	3.52
No. of Analysts	5	9
Low Estimate	10.90	1.23
High Estimate	11.95	6.54
Year Ago EPS	9.54	11.45

Note the high debt level, again from Yahoo! finance. Total debt of $2.9B greatly exceeds market cap of $286M. The bears may be betting that idle, empty ships during a global recession will make it tough for DRYS to make loan payments.

Balance Sheet
Total Cash (mrq):	328.98M
Total Cash Per Share (mrq):	7.554
Total Debt (mrq):	2.90B
Total Debt/Equity (mrq):	1.356
Current Ratio (mrq):	0.716
Book Value Per Share (mrq):	49.091

Disclosures: None. I currently have no positions in DRYS in my personal, "Kirk Lindstrom's Investment Letter" or "The Retirement Advisor" portfolios.

"Kirk Lindstrom's Investment Letter" covers the "core and explore" approach to investing. Its portfolios are suitable for moderate to aggressive investors. FREE SAMPLE.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 94% vs. S&P500 DOWN 14% vs. NASDAQ down 28% vs. Warren Buffett's Berkshire Hathaway (BRKA) up 37% (All through 12/31/08) (More Info)

"The Retirement Advisor" (FREE SAMPLE) portfolios are suitable for conservative investors approaching or in retirement.

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