<p>January 2010 </p><p>Consistent with having been director of Uncharted Waters III technical research at Bateman Eichler, Hill Richards, Wright put in over 20 hours By William Parmenter, editor meticulously preparing his talk, and came equipped with 101 slides. (That slide show, What will the new normal look like? already posted on the chapter website at What will be the trends? What is in store for www.aaiilosangeles.org. provides a wealth of global markets for the year 2010? These were information in a number of categories on questions addressed by David Wright at the Jan. important economic trends. 16 meeting of the Los Angeles chapter of AAII at For context, Wright started his talk by the Skirball Center. looking at the last decade. The current debacle Wright and Tom Petruno, a financial started with the tumultuous year of 2008, which editor at the Los Angeles Times, spoke to a sell- saw Bear Stearns being sold in March, oil out crowd, in what has proved to be the most hitting $146 a barrel in July, Lehman Bros. popular and well-attended in the annual series of collapsing in September and the TARP bailout financial-education lectures. of $700 billion being passed in October. That Wright is a principal at Sierra Investment year the Dow plummeted from 13,264 to 7,552. Management, Inc., a firm that manages over $620 Two major shocks to the nation’s wealth million in client assets. He was a member of the occurred in the last 10 years. The value of Los Angeles AAII board of directors for twenty- stocks, measured by the S&P 500 dropped 50 three years. percent, and the value of houses dropped 40 A capsule summary of Wright’s talk is that percent. One-third of families with mortgages the stock market looks risky now and into the are now under water. future. The market seems poised to take another In his report card for 2009, Wright sharp turn down in a multi-year secular bear looked at stock and bond indices. From a base market. Bonds outperformed stocks in 2009 and, of 100, the NASDAQ Composite dropped to he predicted, they will do so for the next five around 80 in March, the global fear bottom, and years or so. He concluded by offering investors by year’s end climbed to 140. The S&P 500 offensive and defensive money-making strategies. dropped from 100 to 75 and climbed to125. Wright was pessimistic, but not as pessimistic as Marc Faber one of Barron’s Roundtable Panelists forecasting the year 2010. Table of Contents David Wright...... Uncharted Waters ………...p.1 Commenting on trillion dollar federal deficits as Tom Petruno………...…Investing in 2010...... p.6 far as the eye can see ahead, Faber commented, William Parmenter……..New Normal………..………p.8 “… we are all doomed.” Don Gimpel…………….Education Nuggets…………p.8 Marilyn Cohen………….Bond Investing………..……p.9</p><p>1 On the other hand, 2009 was a huge year dropped from 100 to about 50 in March, 2009 for bonds, except for U.S. Treasuries, which had and then partially recovered to 85 by year’s end. one of their worst years ever. Treasuries dropped Northeast Investors Trust, a high-yield from a base of 100 to 75. Other bonds, including corporate bond fund, dropped to 55 and then high-grade corporates, high-yield corporates, the climbed to 105. SEI International Emerging floating rate, and emerging market debt, dropped, Markets Debt fund dropped to 67 in November, from a base of 100, then recovered to from 130 to 2008, then climbed to about 113. This emerging 170. market bond fund showed lower volatility and The top performer was high yield great performance on the up cycle. corporate bonds, which turned up only when Managers Bond Fund, a high-grade stocks did (after the global fear bottom of March, corporate bond fund, dropped to 80 in 2009) and then outperformed all, going from a November, 2008, then climbed to 114 by end of bottom of 55 and then climbing to 105 2009. Wright surveyed the performance of a Hartford Floating Rate fund declined to number of economic indicators for 2009. Long- 67 and then climbed to 105. Putnam Diversified term Treasury yields rose from a base of 100 to Income dropped to 53 and then ascended to 105. 150 in the first half of 2009, and thereafter were Principal Preferred Securities, a flat. Long-term Treasury bond prices in the first preferred stock fund, dropped to 50 in March, half of the year dropped from a base of 100 to 80 2009 and then climbed to 110. Pimco Foreign and thereafter were roughly flat. Bond Institutional barely declined to 95 then In 2009 the U.S. Dollar index dropped, climbed to 115. after the global fear bottom, from 109 to 91 in November, but after that rose to 96. In 2009 crude oil dropped to 35 then rose Los Angeles County Meeting Schedule to around 80 by year’s end. A slide of short-term Computerized Investor Group – Saturday February 6. Speaker interest rates showed them at 5 percent in 2006, Don Gimpel on “Watch the Numbers” at Veterans of Foreign Wars Memorial Bldg. Culver Blvd. & Overland Avenue, Culver then dropping rapidly to .02 percent. The Fed City. For information contact Don Gimpel, 310/276-9875 or remains really worried, and has left short-term [email protected] . interest rates at zero. It is attempting to re-inflate Pasadena Group – Meets at 7 p.m. at the Pasadena Main Library, 285 E. Walnut St., Pasadena on the third Tues. of the the economy. month, except for August and December.) Topic TBA. For A slide of the monetary base, since 1960, information contact Ivan Wong, [email protected] . showed it jumping into the “red danger zone” Mutual Fund Group – Saturday March 6 at 10:30am at the from $800 billion in 2008 to $1.8 trillion in late Fairview Branch Library, 2101 Ocean Park Blvd., Santa Monica. John Kang, Fidelity Investments, will speak on “Fidelity Market 2009. The economy is on life support, and some Update with Investment Strategies”. For information contact of the stimulus programs will end soon. The Gunter Hagen 310/457-7404, [email protected]. The meeting is free to the public concern is global, as there were 474 initiatives Stock Selection Group - Norm Langhout, 310/391-6430, around the world to stimulate the world economy. [email protected]. Fourth Wednesday of the month at 7 p.m. Before going on to why the stock market Fairview Library, 2101 Ocean Park Blvd., Santa Monica. Topic looks risky in 2010, Wright paused to point out TBA Options Special Interest Group meets at Community Room A at the stellar performance of seven bond funds. (For the Westside Pavilion (corner of Pico and Westwood Blvds). For detailed charts of their performance, look at slides information contact Robert Morgen at [email protected]. number 20 through 26 on the chapter web site.) Los Angeles Chapter Skirball Center at 9 a.m, Sat. Feb. 20, All the seven bond funds were tracked for 2010, Frank Barbera, editor, Gold Stock Technician, “What’s Ahead: Overview of the Capital Markets and the Global Economy”; and two years, from the start of 2008 up to end of Dr. Somnath Basu, professor of finance at California Lutheran 2009. All started with a base of 100, and were University, on “How to Build a Sound Retirement Portfolio”. compared to the S & P 500, which over that time</p><p>2 Wright asked why are so many Americans Price earnings ratios of stocks went to 38 fixated by equities, given that all seven of the in 1999, and then dropped to 18 in 2002. The bond funds preserved capital over a two-year P/E ratio was up to 150, way to high, at the end period, and substantially outperformed the S&P of 2009. We have had two big drops in the S&P 500. What, he asked, makes more sense for 500 already. One was of 50 percent from 2000 clients over 50? This is a population cohort that is to 2002, and a second of 55 percent from 2007 interested in a stable income stream and to 2009.Now the market is poised for the next preservation of capital. big drop. Turning to the topic of why the stock Corporate earnings fell off a cliff in market looks risky in 2010, Wright began by 2009, even worse than the 1929-1933 drop. examining the trend in alternating secular bear Compared to previous recessions, earnings fell and bull markets. He showed a slide, also much farther, around 90 percent, this time. presented in his handout, that depicted the Dow Huge problems developed in the Jones historical trend for the last 113 years. It economy, for example the growth of debt since showed multi-year bull markets alternating with the early 1980s. Wall Street securitized new multi-year bear markets. For the last ten years, products, which were mostly transparent or since February, 2000 the Dow 30 has been in a regulated. Derivatives went rampant, to over secular bear with a cumulative return of minus 4.7 $700 trillion in notional value. The world percent. leveraged up. During secular bears, there can be hopeful Currently household debt is falling, as in rallies that market cheerleaders falsely herald as other recessions, and this reduces gross the start of a new bull. For example the 1929 to domestic product. Total government debt is 1934 secular bear market was interrupted by six surging. Tax receipts at states and counties are hopeful rallies. First the market dropped 48 dropping severely. There is $37 trillion of percent, and then recovered 48 percent, while in a unfunded medical obligations. longer term process of dropping a crushing total Housing issues remain a prominent of 86 percent. symptom of the great unwinding of debt. The Another secular bear market occurred housing bubble in home prices is now returned between 1966 when the Dow touched 1,000 and to normal nationally. In California housing 1984 when the Dow declined to 764. During that prices may still have another 25 percent to fall time there were big rallies, one of 67 percent and may not return to normal until May, 2011. between 1970 and 1973, and another rally of 75 Delinquencies on home mortgages are percent between 1974 and 1976. surging, and foreclosures have spread to “good” Another cycle indicator Wright looked at loans in most states. was the four-year Presidential cycle. It has often Bad mortgage loans started the been the case that the market declined foreclosure surge. Now the issue is people significantly during the second year of the losing jobs driving increased foreclosures. president’s term. Spreading unemployment has become the Now it looks like the market is starting the leading cause of mortgage defaults. Five million third major down cycle in the current secular bear jobs have been lost since March, 2008. market. Last Jan. 13 may have been the top In the last 30 months the FHA has been before the decline. The forecast is--Danger funding 50 percent of new home sales. The next Ahead. bubble will be in FHA home-purchase loans. Wright reviewed a number of other Housing starts are 50 percent below indicators to show that the stock market looks normal. What is to replace their huge risky going forward. contribution to employment from 2001 to 2006?</p><p>3 Commercial property prices have been in a Industrial production has fallen to the steep decline. From a base of 100 in 2000, lowest level in 59 years. With manufacturing commercial property prices rose to a peak of continuing to decline where will the 20 million about 190 in February, 2008, and then dropped to new full-time jobs be found to get back to 120 in June, 2009. normal employment? Unemployment issues contribute to a Capacity utilization of factories has forecast for a risky 2010. Given the uncounted fallen hard from 80 percent in 2008 to a current unemployed, the unemployment rate is pushing 20 68 percent. This is the lowest level of capacity percent. The most recent leveling off of jobs lost utilization since 1965, and the trend line is still to the economy is only that, and may prove to be a steeply down. temporary pause. Rents and real estate prices are deflating, Over the last nine years, many working- raising the specter of a deflationary spiral, age people have dropped out of the labor force. which once started is very hard to stop. The These discouraged workers are not counted in deflationary spiral feeds on itself, going like official statistics, thus distorting them. this: falling demand, falling prices, debt The length of time to find a job at 22.5 defaults, bankruptcies, layoffs and wage weeks is the longest since 1950. It is very hard to reductions lead back to falling prices and find a job now. Only 20 percent of the 2009 another vicious cycle down. In such a situation, college grads found one. cash is king. Also hurting the economy is that total What will the new normal look like? corporate payroll is falling Nearly $240 billion What will the economy look like when the dust less was paid to the labor force in 2009, the first settles? How long before we reach that new time in 43 years that total wages paid by major equilibrium? What will be our (lower) standard employers fell. of living? What investment strategy will be best Decline in wages affects aggregate then? household income, in turn affecting consumption, These are good, but essentially, which accounts for nearly 70 percent of the U.S. rhetorical, questions. Before we get to the new economy. Wright next turned his attention to normal there has to be a painful and lengthy consumer issues and business contraction. transition. The economy, market volatility and Consumer confidence recently dropped to the real estate bust have all led to widespread 38, the lowest ever recorded in 43 years. (During anxiety. U.S. investors have begun to lose faith those years consumer confidence fluctuated in what Wall Street has told them for years. It between 44, in 1974, and 143 in 2000.) will take years to produce 20 million new jobs, Consumers are paying down debt as and for Wall Street to adjust their investment employment falls, not a good situation for the thinking. gross domestic product. We may as well forget about the “new The household savings rate after peaking normal” for now, as the transition will consume at 13 percent in 1976 declined until it hit minus 2 our attention for the foreseeable future. percent in 2005. With the recession, the Currently we are in uncharted waters. Today’s household savings has popped up to 4 percent, market is not about volatility; it is about which reduces consumption and thereby gross uncertainty. domestic product. Investors are questioning the “cult of At the same time that households are equities.” The U.S. is the only culture on the suddenly becoming savers again, consumer planet that thinks it is sensible to allocate spending has fallen off a cliff, to .5 percent year significantly to stocks. over year. (It hit a peak of over 9 percent in Even in the U.S., this focus on equities 1988.) did not exist until the late 1940s. Before that 4 people were interested in secure income streams Finally, use trailing stops to limit from conservative investments in bonds and real downside risk, and sell when any significant estate. down movement hits your stop. The interest in equities was gradually The benefit of trailing stops is: a created successively by Wall Street, the mutual sustained downtrend in that holding will not fund industry, then permeated MBA schools, the impact the overall account beyond the set limit CFA curriculum, and became the orthodoxy from (and any slippage); and, since you will not the AAII to Main Street. By now the “cult of tolerate large declines, you will be safe equities” has been fatally discredited—and the investing in somewhat more volatile asset worst may lie ahead. classes, and be more diversified. During the 1990s, Wall Street preached How will the recovery look? Wright’s “stocks for the long run,” and “buy and hold” prediction is that after hitting a temporary That approach would not have worked since 1999 bottom in April, 2009, rallying to a false peak to 2009, when the S&P, although fluctuating, has on Nov. 30, 2009, the market will hit a cyclical been flat. bottom in summer, 2010—that is the next steep Another dour example of stock market leg down. Then there will be a gradually rising underperformance has been Japan’s Nikkei Index. market. Such a scenario comes wrapped with Starting at 13,000 in 1985, the Nikkei rose to questions, such as, is the bottom still ahead? 39,000 by 1990. Since then it has plummeted, Will there be a double dip? Will the recovery be punctuated by bull market rallies, to a dismal weak and slow? 10,000. How has the Sierra Core Retirement Some problems with the “buy and hold” Fund, Wright’s firm’s mutual fund, been doing equities idea are: the downside can be substantial; the last two years? In 2008 the S&P fell 37 one can go a decade or more without any gain; too percent, while the Sierra Core Retirement Fund much focus on one asset class leads one to not pay gave up only 2.8 percent. In 2009, the S&P attention to other profitable up-trends and new gained 26.5 percent, while the fund gained 30.8 opportunities. percent. Investors have multiple reasons for caution The composition of the fund as of Dec. in 2010. Unemployment may have passed the 31, 2009 was low-volatility funds, 11 percent; ‘tipping point”. Some 18 million now want jobs. U.S. and foreign equity funds, 12 percent; high There is no credible scenario that puts those 18 yield corporate bond funds, 10 percent; and million back to work. The consumer remains the other bond funds, 67 percent. key to the economy, and the consumer trends are At the end of December, 2009 the top negative. ten holdings of the fund were: The global bubbles in debt and leverage Putnam Diversified Income Y, 14.2 percent have not been resolved—“big casino” lives on. A Principal Preferred Securities, 11.7 percent new down cycle in stocks looks likely. John Hancock II Floating Rate I, 10.2 percent Wright had some thoughts on a sound Pimco Foreign Bond Institutional 9.6 percent investment strategy for the current turbulent Pioneer Global High Yield A, 9.6 percent market. Give thought to prudent asset allocation, Managers Bond Fund, 7.9 percent considering what fraction of the portfolio should Pioneer Strategic Income Y, 7.8 percent be in each asset class. ProFunds Rising U.S. Dollar, 5.8 percent Next, consider what stocks, bonds, mutual Fidelity Floating Rate High Income, 5.7 percent funds or ETFs should be used to fill each pie ProFunds Rising Rate Oppty 10, 4.8 percent. segment.</p><p>5 dead, is, paradoxically, becoming all too true for Investing in 2010 Americans. The long term financial picture is By William Parmenter, editor between awful and dire. Various municipal and state governments are deep in debt. California Tom Petruno, financial writer and is the worst case with a projected $21 billion columnist for the Los Angeles Times, spoke on dollar budget shortfall next year. Investing in 2010: New Normals, Old Faithfuls The stock market recovery came due to and Inevitable Surprises, at the Jan. 16 meeting of trillions of dollars being thrown at financial the Los Angeles chapter of AAII at the Skirball systems. Bankers have turned out to be tone Center. deaf. What will be the long-term price to pay Petruno started by reviewing last year’s for the stimulus? The fear is that the recovery events. When the market collapsed in March, may not be sustainable. Mounting debt of the 2009 Petruno said he was afraid he would be out U.S. further limits fiscal options. on the street selling pencils. What will be the new normal? Then he quipped, quoting Winston We can expect higher taxes, a long Churchill, “If you are going through hell, keep period of payback and an uncertain financial going.” future. Loans and borrowing stole consumption In March, 2009, it seemed like the country from the future. was on the brink of another Great Depression. What about a recovery? The real Stock prices were at twelve-year lows. The unemployment rate is around 20 percent if banking system seemed about to be nationalized. everything is counted. If people stop being An average of 700,000 people lost their jobs per afraid of losing their job, that could spark a month in January, February and March. The auto modest recovery. But it still leaves a huge industry was nationalized. structural unemployment problem. Jobs are not The economy began to grow again in the coming back. third quarter. The job loss last month was 85,000. Think of Cleveland, Ohio (Petruno’s There is a nagging doubt that the recovery is for hometown). When workers lost their jobs real. Although the S & P 500 has come up off the several decades ago in the steel mills, women low by 70 percent, the public is using it as an started working (say in a drugstore). And, they excuse to sell. had a pension. Domestic mutual funds lost an aggregate The difference today is that people have of $19 billion in 2009. Bonds have suddenly no savings, no pensions, no job prospects and become big, as $350 billion flowed into them. the value of their home dropped from $1 million Bill Gross, founder of Pimco, bought a $23 to $400,000. “I expect that parents will be million house in Newport Beach, to tear down and moving in with their children,” Petruno said. build on the lot. What about equities? If corporate Investors need to remember that fixed earnings are better there could be a modest income (bonds) impose risk, too. As Will Rogers recovery. In part it will be driven by creditor said, it’s not the return on capital; it’s the return of nations like China. capital. Corporations have been ruthless in Petruno expressed concern about two trying to attain efficiency. In the see-saw battle embedded fears. between capital and labor, capital has the upper The first has to do with debt. Baby hand. Over-population and the ‘world wage’ boomers are up to their ears in debt. The joke works in capitals favor. about the retirement system for Chinese workers At the end of 2008 a lot of forced selling that their life fate was to toil until they dropped was occurring. Margin calls were forcing 6 everyone to sell. That is much less likely to People need to look at the cost of happen now as there is a lot more cash out there. owning versus renting, especially in California, There could be a recovery of corporate where home prices may not go up for years. earnings. It seems unlikely that there will be Many corporations will do well over the another systemic unraveling and meltdown like next ten years. There will be successful we had. companies. Many journalists wrote stories on What about the future of capitalism? the theme of the lost decade. But it was not a The country has faced darker days in the lost decade for small cap value stocks, emerging past. Think of the incredible destruction wrought markets and gold. in the Civil War. Think of the systemic It is all about value and what you pay. breakdown in the Great Depression. Investors need to do sound fundamental analysis Worldwide opportunities are incredible. and make sure they are not overpaying. Diversification is the ultimate answer. Four values determine what price should “Hoping for the best” is not an investment be paid for a stock: taxes, regulation, interest strategy. A stock should do well on its own, not rates and inflation. In the ‘90s all four were because of your hope. When you rely on hope going down. (In 2008 interest rates went you are on the wrong path. Abandon hope and negative.) embrace reality. Have an incredibly diversified In the next five or six years it is most portfolio. likely that all four variables will go up, The American public now loves bonds, not representing a significant challenge to the case stocks. The S & P 500 P/E is around 15. Will for a long-term bull market. earnings come through? Where are the valuations Banks are to become like utilities. now? Fairly valued could mean sell stocks. Hope that interest rates and inflation go The fixed income investment long-term up. That could depress the P/E multiple to trends will be amplified. (On this point Petruno under ten. That’s a little pessimistic. So, be agrees with Wright.) careful not to overpay, because then all you We have a cult of income developing. have is hope. Dividends are better than bond interest. (Bond Watch out for the deflation winds. They interest does not rise; dividends can rise over are still blowing strong. time.) After his wide-ranging talk, some of it Investors bought banks for dividends in spoken in investor shorthand to a sophisticated 2000. In 2008 banks blew up. Under TARP audience, Petruno was joined by Wright in a dividends were cut. question and answer session. Corporations could make dividends Petruno was hopeful about the future of (preferred stocks) more attractive. Dividends the BRICs and Latin America. Regarding have a significant tax advantage over bonds, China, he quipped that their investors buy and because bond income is taxed as ordinary income. hold for 30 minutes…it’s a casino. China’s It should be a renters’ paradise for the next strength is that they are creditors, not debtors. ten years in Southern California. Housing was Brazil is exciting for the long run. They overbuilt. We could still have a 25 percent have top managers and it was a good place to be decline in housing prices. in the last decade. In today’s market houses are depreciating We are seeing a deflation in rents, and assets. For a $400,000 home today you need a 20 real estate prices. Food prices, medical care and percent down payment. How can people in the services are inflating. Energy is a wild card. A middleclass come up with $80,000 for a down deflationary spiral is almost impossible to stop. payment? Wright noted the ETF industry is booming. Money came out of mutual funds. 7 Conservative money went into bonds. the world will grow slower than usual. That Speculative money went into ETFs. People buy leads to lower returns on assets. bonds, because they think they are safe. But there Evidence of these trends is showing up is market/credit, and interest rate risk. in the bond market, where yields on ten-year Petruno commented that bonds are often a Treasuries are around 3.5 percent. way station. Usually they are less volatile than The new normal is not an immediate equities. There’s no yield at the bank. The Fed outlook, as the economies of the most does not want you to hold cash; it wants to force industrialized (G7) nations could grow around 4 you to take risk. The Fed would rescue money to 5 percent in the first quarter or half of 2010. funds (like they did with the Prime Fund). Gross said the “new normal” is a longer-term, Wright recommended looking into bond you need to be vigilant and careful, type of mutual funds, to watch out for China, as officials outlook. are lying about their growth numbers, and to expect the dollar to go up in a multi-month rally. Education Nuggets</p><p>New Normal in 2010 By William Parmenter, editor</p><p>By William Parmenter, editor Dr. Don Gimpel’s entertaining and informative five minutes of investor education “ The New Normal” is a term that Bill started with a screen quote on “muddling Gross, founder and co-chief investment officer of through” at the Jan. 16 AAII Los Angeles Pacific Investment Management Co., of Newport Chapter meeting at Skirball Hall. Beach, coined last March. Gimpel was quoting from Adrich’s New Normal is a term that might define website, referring to an economic recovery that the investment landscape for years or decades to might last several years. According to Aldrich’s come, according to observations by Gross in the website it is “mostly free fall from here.” Feb.8, 2010 Forbes magazine. Investors were invited to go to Adrich’s The basic idea of new normal is that the website at www.Adrich.com. which presents economy will reset after the crisis. It looks rather about 20 charts of what is happening in real grim down the road. In Jan. 2009, Gross forecast time. Investors were invited to hear Adrich’s that the future would likely include a lowered view on what will happen to the economy in living standard, high unemployment, stagnant 2010. Expected outperforming sectors are: corporate profits, disappointing equity returns and alternate energy, nuclear energy, international heavy government intervention in the economy. ETFs, medical companies, geriatric companies Nor can investors look forward to much and consumer staples,among others. from bonds, other than their mediocre coupons, Gimpel offered a hearfelt welcome to due to low interest rates. Dr. Roy Shaal, the chapter former program The outlook is that over the next few years chair, a ‘modern medical miracle’, on his return. inflation will increase, the dollar will decline and foreign markets will outperform the U.S. Gross again talked about what he considered to be the new normal, in the Feb. 1, 2010 Barron’s, mentioning three factors. One is the process of deleveraging—paying down debt, which is under way. Number two is more government regulation, a direction the Obama administration is headed. Number three is de- globalization, in which various countries around 8 Bond Investing in Our Crazy New World complicated the capital structure, the more yield the investor should earn. By William Parmenter, editor The municipal bond market generic municipal ‘A’ yields in Nov. 2009 were: one year Marilyn Cohen spoke on bond investing to at 1.45 percent; five year at 3.05 percent; and, ten the Los Angeles Chapter of the AAII at the year at 4.25 percent. November, 2009 meeting at Skirball Center. Cohen made the following investment She is the publisher of Forbes Tax recommendations: Advantaged Investor, and the president of Envision Jefferies Group at 5.5 percent, due March Capital Management Inc., in Los Angeles. 15, 2016, CUSIP: 472319AB8, rated Baa2/BBB. When the stimulus party is over (i.e. the Leucadia National at 7 percent, due Aug. $700 billion of the federal government’s Troubled 15, 2013, CUSIP: 527288AS3, rated: B1/BB+ Asset Relief Program is all spent), beware of the Textron Inc. at 5.6 percent, due Dec. 1, hangover, said Cohen. Based on the stimulus, the 2017, CUSIP 883203BL4, rated Baa3/BBB- markets had a huge run; now, where do you Alcoa Inc. at 6.75 percent, due July 15, rebalance? 2018, CUSIP 013817AS0, rated Baa3/BBB- Regarding balance sheet repair, one can look Picks recommended for ETFs were: ISHG at the tale of two markets. Corporates: share iShares 1-3 year Intl Treasury, and, IGOV iShares repurchases from 1997 to 2008, with $2.4 trillion S&P Intl Treasury. spent and terrible debt transactions. For more information on bond investing, That was then. Now, there will be no more one can consult the book, Bonds Now, Making ego-driven buy backs. No more insane debt-driven Money in the New Fixed Income Landscape. acquisitions. Equity is to be issued to pay down Cohen and Chris Malburg were co-authors of the debt. More conservative stewardship is ahead. book, which has a foreward by Steve Forbes. Municipal bonds have not been a pretty In closing she recommended the following story, but one rather of a great disconnect. free websites, as being helpful for investors to What has been happening. Yields have been keep from having their pockets picked: dropping. www.investinginbonds.com., and In municipals: the BABS effect: reduced www.emma.msrb.org. tax-exempt issuance. Credit quality has Cohen may be contacted at her firm, deteriorated and net yields dropped. It is all about Envision Capital Management, Inc. at phone 1- supply and demand, so Cohen admonished the 800-400-0989, website www.envisioncap.com. investor to be defensive. The minimum account size is $500,000. In Corporates, new issuance has been snatched up by institutions. It is becoming a private Orange County AAII Announcements placement market. Spreads continued to narrow. Investors should stay away from: smart notes, direct For more information about the Orange notes, and internotes. County chapter of AAII and their meetings, go What about new purchases? Stick with: to [email protected]. short bonds with low premiums, large issue size. Study the debt distribution and balance sheet. Note to Pro Forma Contributors: There is a low chance of government interference. A mentioned possibility was Fisher Please have your copy emailed to the Scientific at 6.125 percent, due July 1, 2015, and editor by the fifth of the month. Letters and callable on July 10, 2010. These bonds are at the comments are welcome. If you want to email an front of the line, said Cohen. article about the fragile financial system, the Investors should know the capital structure shape of the economy after it resets, or some and know the debt distribution. The more 9 other financial issue, you will have a chance to 90802, or use email to send copy to the editor at appear in print and inform Pro Forma readers. [email protected]. Book reviews are welcome. Mail disks to: My home phone is (562) 437-2412. 319 Walnut Ave., Apt. 2, Long Beach, CA. </p><p>Pro Forma</p><p>Pro Forma Editor William Parmenter Pro Forma Editor, Emeritus Orvis Adams</p><p>SIG GROUP CHAIRMEN</p><p>IBD Meet-up/ AAII CANSLIM Norman Langhout Mutual Fund Group Gunter Hagen Options Group Robert Morgan Pasadena Group Ivan Wong Palm Springs Group Patti Gammino San Fernando Valley Group Evan Press Westside Computer Group Don Gimpel</p><p>Pro Forma is offered free of charge exclusively via email and is also available for downloading from the Los Angeles Chapter web site at: www.aaiilosangeles.org. The American Association of Individual Investors is an independent nonprofit corporation formed for the purpose of assisting individuals in becoming effective managers of their own assets through programs of education, information and research. Pro Forma is published for advising members of the groups' activities and for sharing information. All material compiled without verification of accuracy to a specific task or computer system. All material provided in the ewsletter is for educational and illustrative purposes only. Comments are the views of their author and no other person or organization. Investing is an inherently risky business. Investors may loose their entire investment or more. Past performance is not a guide to future return.</p><p>10</p>