The market has had a tremendous run since September 1st, up 18.5% including dividends. I think running a very conservative portfolio right now is important, so am cutting my exposure a bit more via shorting some SPYs. Looks like I traded them a little over 124. Generally speaking, I am running under 30% net long equities now (down from peak of 50% in October), 30% net long bonds. Bondwise, I own short duration corporate bonds (CSJ) or emerging market so as to be short the dollar. The selloff in treasuries continues, with the 10yr now at 3.53% compared to 2.5% just last month. TLT (long dated treasury proxy), is down 13% in a little over a month!
I think selling any loser names or reducing risk is a good idea. I get a lot of "this market is going to tank in january" vibes from friends in the business. My technical service at IBD suggests that the Nasdaq has now had 5 distribution days in the past month (selling on heavy volume, a negative indicator). They put the market trends at "upturn under pressure."
On another topic, lately there has been a lot of talk of municipal bonds or muni's. I spent a long time as a credit guy, but mostly in corporates so my expertise is limited here really. But noting that Bill Gross bought $4.4mm of muni funds last week, I thought it was worth taking a look. I do like to buy beaten up names when conditions look oversold.
First of all, lots of munis are VERY long dated (ie with maturities out 20-30 years). That means you have a ton of duration risk (ie if interest rates in general move up, you get hammered on your muni bond's prices). Further, I am generally bearish on treasuries, and believe rates will be in the 4-5% range within 6-12 months. Right off the bat, this doesn't bode well generally for them in my opinion.
Secondly, there are 2 types of muni's: General Obligation (GO Bonds), and Revenue Bonds. Revenue bonds are backed by a specific project or stream of revenue, and in my opinion are the way to go. GO Bonds are backed by the taxing authority of whichever state they are issued by, but many states bear an enormous pension problem so that is part of your liability.
Just to get my head around how bad the pension problem is, in NJ for example, consider the following. An elementary school teacher today starts out with a $45,000 salary roughly speaking. After 20 years, they are making almost $100,000 per year. Wow not bad. The state withholds 7.5% of their income which goes to the general state pension fund. I did the math, over a 30 year career, the state of NJ would have collected about $153,000 toward your pension (assuming your salary went up to the 100k level, straightline).
Now the formula for retiring means you can quit at 55 and get 55% of your highest 3 years of salary. So if you live to be 80, that mean you'll receive $52,000 per year for 25 years. Thats future state costs of $1.3 MILLION! Vs contributions of $153,000. Ok yes, you are correct in thinking that the state earned returns on that money over 30 years, so the $153,000 of contributions would be higher. However the states actual returns in the last decade were 2.5%, vs an expected return of 8.25%. So, its more like $200-300k at the end of day. On an aggregate basis, NJ today has $67BB in its pension fund, with annual payouts approaching $10BB. Doesnt take a genius to realize that it will be broke in 6.7 years, plus whatever returns they generate. (or less whatever they lose!).
So, state GO bonds may be lots better in your state, but generally speaking, seems like a lot of work to make 5%, with a whole lot of risk. The muni market overall is 2.8TT, and one estimate is that state pension liabilities are another 2.8TT.
Revenue bond wise, I gave up. I couldnt find an ETF or a closed end fund investing in a selected basket of revenue bonds. Yes, I'd love to be secured by a good tollroad or water plant, but wasnt able to find one. If you do, please let me know. If you are interested in muni's, MUB is a non-levered ETF that has gotten absolutely destroyed, but at a 3.75% yield, i'll pass. (perhaps owning UTF is just as good, see an earlier post).
Regarding the bond master, Bill Gross bought several funds: PMX, PCQ, PCK, PZC, PMF. These are Pimco closed end funds, 3 of which are in California, and their yeilds look good (8%). However, they use leverage to get there, and all look very rich to its historical NAV premium. (driven by Bill Gross's buys, these are rallying, while the underlying NAV of the bond fund is still falling!). For example, PMX is at a 19% premium to NAV, and its 3yr average premium to NAV is 8%. You are paying $10.35 for this, when the NAV of the portfolio only adds up to $8.71. Bill Gross is very good, but understand he was buying PMX below $10/share, when the NAV was around $9.50 / share.
Too bad I couldnt get a borrow on any of these shares! If you own muni's, be careful. I didnt even mention what the expiration of the Build America Bonds program will mean for muni demand in 2011. But it can't help.