AssetPreserver News

The Federal government has been rolling over its loans for a long time. The last time the federal debt was paid off was in 1835 under Andrew Jackson.

Tired of housing prices going down? Happy when they go up? Investors can now bet for or against a recovery in the residential real estate market with new exchange-listed securities designed to mimic the movement of U.S. home prices.

Investment manager MacroMarkets on Tuesday launched exchange-traded products on the NYSE Arca (Archipelago Securities Exchange) designed to track housing values.

MacroShares Major Metro Housing Up and MacroShares Major Metro Housing Down are benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index. The paired securities will feature a 300% leverage factor.

“For the first time, the market will have available exchange-traded benchmarks as an indication of where investors believe U.S home prices are headed,” said Robert Shiller, MacroShares chief economist.

“Our current financial crisis is largely due to a failure to manage housing risk,” Shiller added. “At approximately $20 trillion, U.S. housing is a large and important asset class that has suffered from the lack of liquid, transparent markets.”

The MacroShares Major Metro Housing Up is designed to rise when U.S. housing prices climb. Its counterpart, MacroShares Major Metro Housing Down, profits when real estate values fall.

MacroShares exchange-traded products (ETP) don’t invest directly in an underlying asset such as stocks, bonds or commodities futures. Instead, MacroShares are issued in pairs, and an equal number of shares for each fund are created. The funds invest in short-term Treasury securities and overnight repurchase agreements.

The paired trusts have a binding agreement to pledge assets to one another over time, based on the movement of housing prices. This transfer of Treasury securities back and forth between the funds changes their values and gives investors exposure to the direction of U.S. home prices. The structure resembles a see-saw as the assets are shuffled between the paired trusts. The arrangement has also been compared to total-return swaps.

Because of the leverage factor, the MacroShares will experience changes of three times, or 300%, of the S&P/Case-Shiller Composite-10 Home Price Index.

The MacroShares, which can be traded intraday, have key differences from traditional ETFs. MacroMarkets warns that the prices of the funds may diverge from underlying value.

“Premium or discounted prices for these securities reflect a variety of market factors and expectations,” the firm says. “For example, the market price of MacroShares Major Metro Housing Down will reflect supply, demand, and investor expectations regarding the future path of home prices over the remaining term of the security.”

The funds will make quarterly distributions of net income, if any, on the Treasury securities.

MacroMarkets had tried to launch the home-price products through a public auction, but no bids were accepted because there was insufficient demand for an equal number of Down and Up MacroShares at the prices at which such shares were offered in the auction.

Last year, MacroMarkets liquidated a pair of funds linked to crude oil prices when the “down” version ran out of assets when prices spiked. The oil funds saw premiums and discounts to net asset value. The company followed up with MacroShares $100 Oil Up Trust and MacroShares $100 Oil Down Trust, but the funds were recently shut down due to lack of assets.

The new MacroShares tied to home prices will be followed closely by ETF observers. The products’ backers say the structure can give investors exposure to inaccessible asset classes or economic indicators.

Note the shares are a in a trust and mature in November, 2014.

Summary

UMM – MacroShares Metro Housing up. 300% leverage. 1.25% expense ratio (expensive).

DMM – MacroShares Metro Housing down. 300% leverage. 1.25% expense ratio (expensive).

According to MacroShares website, they are a publicly-traded partnership which means all income will be reported on a K-1 form (rather than a 1099 form).

Pipeline master limited partnerships (MLP) are such boring investments because not much can go wrong. They are the most conservative of the natural resource MLPs and provide stable cash flow and slow growth.
In the short-term, the winter could be too warm or the summer too cool, reducing transported volumes below expectations. But pipelines don’t go out of fashion. They are not in danger of being made obsolete by new products. And, since pipelines usually don’t duplicate each others’ routes, they don’t have competition.

Increasing energy-price exposure

MLP pipelines come in two types: petroleum pipelines carrying crude oil or refined petroleum products, and natural-gas pipelines.

Petroleum-pipeline operators base their fees on the volume of product transported. They’re not affected much by the price of oil.

By contrast, natural-gas pipeline operators frequently also run gas-gathering systems, which connect wells to public pipelines as well as processing plants. Typically, gathering and processing contracts expose pipeline operators to changes in the price of natural gas and its byproducts. So natural-gas pipeline operators profit margins can vary with the price of the commodity. Some operators employ hedging strategies to reduce their susceptibility to price swings. But not all do because that limits their upside potential.

While several pipeline MLPs focus on natural gas exclusively, some petroleum-pipeline operators have recently acquired natural-gas assets and others are planning to do so. It appears that eventually, most pipeline MLPs will have at least some natural-gas pipelines, and thus, at least moderate susceptibility to price swings.

Pipelines are fee-for-service businesses. There are long-term contracts and long-lived assets. Commodity risk is minimal. Kinder Morgan, for example, gets $1.35 to move a barrel of gasoline to Phoenix from Los Angeles regardless of whether oil prices are $25 or $50.

Common Problems in Gas Pipeline Transmission

Midstream transport of natural gas is a key part of the energy commodity chain. The transport stack consists of 3 key components: gathering, transmission, and distribution. Each component faces a common set of problems when it comes to significant safety incidents. However, the causes vary by percentage for each.

Gathering Problems

The gathering system of pipelines is the key to transporting natural gas from the wellhead to plants where it can be processed for transmission (aka “sweetened”). Typically, this gas is extremely corrosive and can be dangerous, often requiring special pipelines to transport it. As a result, most safety incidents in this system of pipelines are caused by corrosion (49%). Further, approximately 20% of total gathering incidents are caused by internal corrosion.

Common Problems in Gas Pipeline Transmission

Transmission, or the shipping of gas via interstate pipelines, also suffers from a similar set of problems. Unlike pipes used for gathering, corrosion accounts for about 22% of incidents (with only about 5% due to internal corrosion). However, excavation damage accounts for approximately 23% of all safety incidents (vs. 15% in gathering) . Further, material failure such as malfunction of control equipment, faulty pipe seam welds, ruptured seals, and broken couplings are the root cause of about 18% of incidents. Finally, 11% of problems are caused by natural forces such as movement of the earth, flooding, high winds, and even lightning. The balance is due to human error and other damages.

I thought long and hard about making my investment life easier – just merge all the investment accounts into one broker. One monthly statement. One broker. One online institution. Good idea?

Bad idea.

After all the turmoil of the financial system in the past year or so, it seemed self-evident that holding all of ones assets in a single institution was toxic. When a financial institution gets into trouble all your money may be tied up for weeks or months. I couldn’t imagine pleading with a bank or broker for my money so I can pay the bills and be told sure, in a few weeks.

Another eye-opener is if someone swipes your financial identity and drains your account. If you have more than one, it is not an immediate disaster. Yes, there have been notices sent out that your personal information has been compromised and we promise to watch your credit account for 90 days. BFD. Identity thieves know about the 90 day limit. Check out the identity theft prevention tips.

What is the solution?

Dividing up assets into three institutions is prudent. Make sure there is a checking account or easy money transfer available at each one. Be vigilant in monitoring your accounts.

The unthinkable can happen.

AP

Good news. The FDIC has extended its coverage through 2014. To quote:

Deposits at FDIC-insured institutions are now insured up to at least $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except for IRAs and other certain retirement accounts which will remain at $250,000 per depositor.

You can check with the FDIC periodically to see any changes to their policy.

Also, credit union members are covered, too.

The National Credit Union Administration who administers the National Credit Union Share Insurance Fund (NCUSIF). Backed by the full faith and credit of the United States government, the NCUSIF insures the member accounts in all federal credit unions and the substantial majority of state-chartered credit unions.

Starting Oct 3rd, 2008 and ending Dec 31, 2009, the deposit insurance for an individual has been raised to $250,000. This has been extended to Dec 31, 2013:

The Emergency Economic Stabilization Act of 2008 increased the insurance coverage on all accounts up to $250,000. until December 31, 2013.

AP

The standard Standard & Poor’s 500 is capitalization-weighted; that is, each stock’s percentage of the index is based on its market capitalization. The other S&P 500 is equal-weighted; that is, each stock has the same percentage of the index so no stock dominates the index’s influence. Is this good?

Not bad, so far.

In 2009, the equal-weighted S&P 500 is up 17% while the cap-weighted index is up about 5.5%.
From 1990 through June, 2009, the equal-weighted index was up 9.1% vs. 7.5% for the cap-weighted index.

Disadvantages

There are some caveats with equal-weighted index:

1. Higher transaction costs.

The equal weight indexes are rebalanced every quarter (which adds to higher cost) whereas the cap-weighted index requires balancing only if the stocks of the S&P 500 index changes.

2. More volatile. This is primarily due to the propensity of smaller companies to be more volatile than larger. Since there is equal weighing, the small company volatility is amplified.

3. The dividend yield tends to be smaller than the cap-weighted index.

All is not perfect. In 2007 and 2008 the equal-weight index performed worse than the cap-weighted version.

Indexes

RSP – Rydex S&P Equal Weight Index (ETF). Replicates the S&P 500 Equal Weight Index. Inception date: May, 2003. 0.40% expense ratio.

SPY – Cap-weighted S&P 500 Index (ETF). Replicates the S&P 500 Capitalization Weighted Index. 0.10% expense ratio.

There are a few mutual funds that emulate the equal weight index but their expense ratios are more than 1.00% which is outrageous for an index.

As usual, this article is for informational use only.

I have been studying monetary policy, banking, the Fed, and overall money creation. I came across this snippet from THE CREATURE FROM JEKYLL ISLAND – A Second Look at the Federal Reserve which is relevant to today’s banking situation.

The FDIC has three options when bailing out an insolvent bank.

The first is called a payoff. It involves simply paying off the insured depositors and then letting the bank fall to the mercy of the liquidators. This is the option usually chosen for small banks with no political clout.

The second way is called a selloff, and it involves making arrangements for a larger bank to assume all the real assets and liabilities of the failing bank. Banking services are uninterrupted and, aside from a change in the name, most customers are unaware of the transaction. This option is generally selected for small and medium banks.

In both the payoff and selloff, the FDIC takes over the bad loans of the failed bank and supplies the money to pay back the insured depositors.

The third option is called a bailout. In a bailout, the bank does not close, and everyone – insured or not – is fully protected. Such a privileged treatment is accorded by the FDIC only rarely to a select few.

The select few are wealthy and powerful banks that are considered too big to fail without doing terrible harm to the community. Note that ALL deposits are covered; even those over the FDIC limit. This gives these banks a definitive competitive edge.

I came across this recently and thought it might be of use. It is the FDIC’s ongoing list of failed banks since Oct 2000. Clicking on each bank gives information on the failure and what is in store for the customers.

The United States Gasoline Fund, LP (UGA) is an interesting fund that tracks the price of unleaded gasoline.

To quote:

The trust will invest in the futures contract on unleaded gasoline delivered to the New York harbor traded on the New York Mercantile Exchange that is the near month contract to expire.

The trust is organized as a limited partnership meaning you will get K-1 forms (around March)  instead of 1099 forms. The expense ratio is 0.60%.

Gasoline prices are volatile and are dependent on many factors:

• crude oil price
• refining capacity
• supply and demand
• seasonality
• government regulations
• government taxes

Here is a link to the United States Gasoline Fund home page. The fund is managed by United States Commodity Funds, LLC.

Remember, the fund tracks gasoline prices, not oil prices. Also, no dividends are paid.

We have no holdings or vested interest in this fund nor is this a recommendation.

Doug

The I-bond rates, adjusted every May 1 and Nov 1, were released:

Fixed rate = 0.10%
Semiannual inflation rate = -2.78%

which gives a composite rate of -5.46%. Since I-bonds are guaranteed not to give negative returns, the interest rate from May 1,2009 to Nov 1, 2009 is 0.0%. In other words, nothing is earned. This anomaly is due to the fact that deflation occurred as measured by the consumer price index (CPI).