The U.S. policies have driven short-term interest rates to Japan-like levels, creating “free” money for banks, creating a massive carry-trade speculative investment funds flow,  financially crippling low and middle income senior citizens who have historically relied on bank deposits to supplement their meager Social Security checks, and pushing very hard on investors to leave the short-term Treasury “nest” to take flight into riskier assets.

The goal, of course, is to rehabilitate the banks; but they are doing so at the expense of taxpayers, at the expense of savers, while forcing cautious investors into risk assets they do not prefer at this time, while creating a massive tool for the carry-trade speculators, and while restoring enormous bonus potential to financial executives whose Boards will reward them for seeming to have solved their company’s problems (when free money will have been the main medicine).

Never before, and we hope never again — or Japan

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The old normal allocation between the three most basic classes (Cash, Bonds and Stocks) is currently the new normal.

While the old normal return expectations for U.S. securities, and the allocation between U.S. securities and global securities (particularly emerging market securities) is not likely to be resemble the past; the old normal weighting between cash, bonds and stocks from whatever country is more likely to be used than not.

The last decade was abnormal in the preponderance of equity risk assumed in the aggregate across all households in the United States. The old normal is more balanced, which is something the typical investor advanced in age or wealth accumulation is seeking these days.

Based on Federal Reserve data from 1945, the average allocation between cash, bonds and stocks was approximately 10%, 40% and 50% respectively. The average over the past decade was about

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Nobody has the time or patience to wait 82 years to experience the long-term, but if they did (or if they wanted to bet on the future based on the long-term past), here is how a simple allocation between the S&P 500 index and the U.S. Aggregate Bond index worked out from 1926 through 2008.

Related proxy funds:  SPY and VFINX for stocks; BND and VBMFX for bonds.

Disclosure: We own both SPY and BND.

Richard Shaw QVM Group LLC

Last night the U.S. House of Representatives brought us one large step closer to a national healthcare system. Investors should be cognizant of the financial effects that would follow.

In the extreme short-run, it would be reasonable to assume that the U.S. stock market would react negatively, although short-term price movements are often chaotic. In the intermediate-term, if the legislation goes forward, the healthcare sector should perform at a lower level than in periods prior to national healthcare.

The chart below shows the historical relative price performance of several healthcare sectors versus the S&P 500. They are: biotech ($DJUSBT), pharmaceuticals ($DJUSPR), healthcare providers ($DJUSHP), medical equipment manufacturers ($DJUSAM) and medical supplies ($DJUSMS). The overall healthcare sector is represented by $DJUSHC.

Biotech and pharmaceuticals have underperformed. We expect that relationship to be accentuated. The other sectors are expected to have lower relative performance than before, particularly the healthcare

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We generally prefer investment funds over individual stocks to minimize investment selection risk (focusing more on asset allocation as the greater issue).   However, when we do look at individual stocks, we focus on quality companies with financial strength, limited leverage, solid cash flow, and growing sales and dividends.

This short list consists of companies that  are candidates for consideration.  If you are a do-it-yourself investor who prefers individual stocks; and you have a non-speculative, conservative approach, this list may be worth researching further.

We identified those companies that S&P rated B+ or better for earnings and dividend strength, and which paid dividends continuously for at least 10 years.  Subsequently, we ran that list through a fundamental filter (described below) to arrive at this list of six prospects.

These are not recommendations for purchase, but they are a list that has been “worked over” a bit from the data angle.  We have not made

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Amidst all the soundbites and data tidbits about the condition of the U.S. fiscal and debt situation, it may be helpful to look at the data produced by the Congressional Budget Office.  While they may be way off, it is a good idea to know what figures your government is using to make its spending and tax policy decisions.

The downloadable PDF file provides an historical perspective from 1968 through 2008, and projections for 2018 for taxes, spending and public debt.

click image to download PDF file

On the economic projection front, the CBO sees real GDP growth for 2009, 2010, 2011 and 2018 at: -2.5%, 1.7%, 3.5% and 2.2% respectively.

They see unemployment for the same periods being: 9.3%, 10.2%, 9.1% and 4.8%.

For CPI, the CBO sees -0.5%, 1.7%, 1.3% and 2.0% for

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There are many good things about being rich, but wealth also brings some problems.  The most obvious problem is how to stay rich in these troubled times.  Less obvious for the wealthy is that they have fewer practical investment vehicles than the average investor.

Just as large institutional investors have a smaller universe of individual stocks they can buy without becoming too big a factor in the security.  Wealthy individual investors and smaller non-profit or institutional investors have a smaller universe of funds they can buy without becoming too big a factor.

There are more established mutual funds of substantial size than there are ETFs of similar size, which argues for mutual funds over ETFs for large investors.  However, for those who wish to be in a listed security for intra-day entry or exit (including using automated stop loss orders to protect against large drops in price), mutual funds don’t work.

With ETFs

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This article presents the shape of the price change frequency distribution for the S&P 500 over approximately six decades on a daily basis, monthly basis and calendar year basis.

The degree of “normality” of S&P 500 price changes is high on a daily basis — it’s visually symmetrical.  The average change of 0.03% is less than the median change of 0.05%.

The monthly distribution is not as visually smooth or symmetrical, but presents a “pretty” good bell shaped curve.  The average change of 0.67% is less than the median change of 0.91%.

The calendar year distribution requires a bit of squinting and some imagination to see a bell shaped curve — making it “sort of” normal looking.  The average change of 8.02% is less than the median of 9.76%.

The most extreme outliers, as measured by standard deviation, are at the daily level, then monthly and lastly calendar year.

click images to

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The CBOE publishes several options implied volatility indexes that can be helpful to stock investors who want to peek around the corner to the future through the eyes of options traders.

These two tables show the options implied (30-day future) volatility for several important indexes or index funds:

click image to enlarge

The “per year” column is the published annualized volatility (1 standard deviation). The columns for other periods (quarter, month, week and day) are math transforms of the annualized volatility to show the expected volatility for those periods of time.

Plus or minus one standard deviation is expected to encompass 67% of prices during the period.  Plus or minus two standard deviations is expected to encompass 95% of prices during the period.

Example:  The “per day” column says that the price of a GLD position is expected to

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This is a practical follow-up to our recent article on volume as an indicator, and on divergence between volume and price action in particular.

We screened the S&P 1500 for stocks with rising prices and falling volumes.  More specifically, we looked for stocks with “sinker” attributes:

last closing price > 21-day simple moving average price positive 21-day price rate of change negative 21-day volume rate of change negative money flow (more vol. on down days than on up days)

We had the necessary data for 1470 of the 1500 stocks. Of those 104 met the sinker screening criteria as of end-of-day Oct. 15, 2009.

This image shows the 10 companies from that list with the greatest negative 21-day volume rate of change.  (download spreadsheet of full list).

click image to enlarge

If you own any of the stocks on the screened

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