Early Bird Note on Inflation

Dear rss free blog,

Your editor has a 10-year Treasury bond coming duethis month, an inflation-indexed one on which
I pay Federal but not state and local tax. It has not been a brilliant
investment, because I would have earned more (and paid more tax) had I owned a
straight T-bond.

Now I must decide if I want to roll it over into another
inflation-indexed bond. Given the current economy I swing to no.
On the one hand, deficits in the US and lots of other countries mean that there
is a risk of inflation taking off again, later if not immediately. But are
these bonds, on which the inflation protection is taxed, the best way to handle
the price rise risk?

And short-term I am not convinced that inflation is about to turn
ugly again. With US unemployment stubbornly high, the odds are against wage
demands triggering renewed price hikes. Without higher wages, demand will
remain restrained, also keeping inflation under control for now.

However, beware the price of oil, a key cost factor, and other raw
materials, are being pushed up by a combination of Chinese demand, speculation,
and, most recently, bad weather. Cost-push inflation is a real risk.

Moreover, some countries have already begun tightening to push up
interest rates. Their bond-holders are suffering (because old bond prices fall
when new bonds come out with a higher yield.) This is the case for raw-material
producers like Norway and Australia, and countries spared the crisis for other
reasons, like Israel.

And while the US is not a rickety Latin American populist state
like Venezuela or Argentina, where raids on the central bank and devaluations
are the order of the day, we are not exactly the homeland of sound monetary
policy either. If Washington were to fiddle with the CPI data as Argentina
does, it could cut the inflation payout with these bonds.

So when my bond comes due I’ll take the cash. More for paid
subscribers about our portfolio follows.

*Explanation I. Why am I adding to the speculative portfolio, I was asked. Among
others things because I think I have been too conservative in the past 15
months. In theory, the buy and hold portfolio should underperform the
speculative, but this did not hold lately.

*Explanation II. I took profits in the Covestor
yield portfolio with NatWest and Royal Bank Of Scotland preferred shares and moved the money
into safer yield stocks. The main reason is that I think the current boost in
the preference shares (both of which are linked to RBS) is overdone. RBS is
selling bits of its over-grown worldwide empire to other Pacific Rim and
European banks and brokers, and there is talk that it will hive off its banks
for high-net worth individuals (like Queen Elizabeth II, who banks with Coutts & Co., an RBS sub.)

Having problems with Interactive Brokers, I wound up losing part
of my gains because they automatically sell a round lot and I did not have one
with NatWest. I had to buy back the shares I had inadvertently sold short and,
surprise, surprise, the market maker was waiting for me to notice with a high pegged
price for the 45 shares. To wiggle past his barricade I put in an order for
more shares (50) than I was short and therefore borrowed from IB until we get
the huge $1.80/sh payout from DRP this coming week.

The idea behind the switch in the preferred shares to Barclays is that these
moves will make the payout safer. For Covestor
investors with only $10,000 to invest, I have to stress safety. You fatter cats
and I can afford more risk, and moreover we would be taking losses having
already cut our exposure to the RBS lot by half.

P.S. Because I am working on Sunday (tomorrow I go to the Sidoti Group micro-cap conference) I am running a whole bunch of ads. Help our bottom line by clicking through to our advertisers.