Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

Who’s Buying TIPS?

Montreal, Canada

Who's buying Treasury Inflation-Protected Securities or TIPS? Rates are at rock bottom and inflation is falling, not rising.

For the first time since their introduction in 1997, TIPS now harbor the lowest yields.

Yesterday, the five-year TIPS closed the session yielding nothing – that's right, absolutely zero. At this morning's opening, the note has dropped a bit to yield a mind-blowing 0.06% or six basis points! That's not exactly the Field of Dreams when it comes to yield.

The break-even rate, calculated by subtracting the nominal Treasury bond rate less TIPS' yield, is just 1.36%. Nominal five-year Treasury bonds yield 1.42%.

In 2010, the total return of the Vanguard Inflation-Protected Fund is 5.6%; that's an enigma because inflation expectations have literally crashed since May when benchmark ten-year Treasury bonds yielded about 4%. Investors buy TIPS because they seek inflation protection – not a deflation hedge. Or perhaps this is not the case…

Benchmark ten-year TIPS yield 0.94% and, adjusted for the break-even compared to nominal Treasury bonds, which yield 2.61%, pay just 1.67%. That means the market expects an average ten-year inflation rate of just 1.67% from now until 2020.

Who is buying TIPS in this accelerated environment of disinflation?

TIPS provide an absolute floor even amid deflation. TIPS can't yield less than zero whereas nominal bonds can -- if demand is strong enough to drive rates into negative territory. This occurred in the 1930s. But TIPS are attractive for this reason: Yields can't go into minus territory. That would explain why investors continue to bid TIPS prices higher even though deflation fears have mounted since May.

From my end, I would not buy TIPS now. I wouldn't lunge after non-TIPS fixed-income securities, either.

We've had an explosive rally in bonds since May and prices right across the curve are really expensive. TIPS aren't cheap and offer a raw deal. Ultimately, higher inflation down the road might draw interest from bond investors into these securities; but what's the point if interest rates are rapidly rising? Who'll want to buy TIPS? If anything, Treasury bills will draw the bulk of fund-flows, not bonds or TIPS as rates eventually rise.

TIPS are not forecasting an inflation problem any time soon. Recent price action, however, might be a deflationary strategy now in-play among bond investors as they seek to hedge not against inflation, but deflation.

Growing Liquidity Trap Forces Fed’s Hand

Zurich, Switzerland

The odds were always high that one or more central banks would eventually bungle monetary or fiscal policy in the post-2009 credit crisis recovery environment. In the context of the most formidable and extensive unorthodox monetary operations since the 1930s, the Federal Reserve has seemingly pulled almost every rabbit out of its hat since August 2007.

Did investors really believe we'd get through this mess without a hiccup?

Another liquidity trap might be at the cusp of testing the Fed this summer as Treasury bond prices surge and risk assets commence another leg south.

Two-year notes are approaching record lows and suggest the Fed needs to act. Long-term rates, as measured by the benchmark ten-year T-bond, have seen yields crash from 4% in April to 2.72% this morning. This action is a warning shot for the Fed as the economy continues to cool since May, compounded by credit stress in bank lending and a deep bear market in the housing sector.

It's been a rough year for most investors outside the confines of fixed-income securities as wild gyrations in equities, commodities and currencies challenge even the best hedge funds in the business.

After a strong bounce in July most indexes are now down again in 2010 following a sobering Wednesday whereby the averages fell about 2.5%. As Dugald pointed out yesterday, the U.S. broader market looks like it's rolling over again; but we've already seen two similar breakdowns since May with neither bulls nor bears really making any serious money amid a volatile trading range.

The Fed, acting as the printing machine of only resort, announced QE2, another round of quantitative easing, this week as the central bank takes the interest from its vast pool of mortgage-backed securities and begins buying the long-end of the Treasury market. The Fed wants to keep long-term interest rates down. By throwing another few hundred billion dollars at the curve, the Fed is expanding its bloated balance sheet again in its effort to grow liquidity in areas of the economy that need it most.

Banks in the United States don't seem bullish on lending. And the best customers don't seem too bullish about borrowing. Companies outside of the financial sector are sitting on roughly $1.8 trillion dollars of cash and, outside of technology spending, aren't doing very much with that cash. Some have boosted buybacks and raised dividends; overall, the flow of cash is stuck in Treasury coffers at most businesses, including the biggest banks, which continue to purchase Treasury bonds.

The bond market is now entering the gates of its "last hurrah." The grand 1981 to 2010 bond market super-cycle is nearing an end. Yields are likely to take out the December 2008 low of 2.2% on this rally and, possibly, break 2%. I would not buy bonds at these overbought levels. I'm pretty confident the Fed will pour more money into the financial system and, at some point, will get its wish – higher inflation that'll be difficult to cork once it's out of the bottle. Helicopter Ben is coming back in 2010.

I'll be in-transit tomorrow from Europe and will be back on Monday. Have a nice weekend.

Why Bonds are in Bubble-Trouble

Barcelona, Spain

Can the stock market peak in this cycle without the individual investor? If history is any guide, the odds are pretty low that equities will tank because investors remain net sellers of stocks funds. From a contrarian perspective, the individual investor is a useful barometer; but based on historical evidence, retail fund-flows really don't boost the market. Hedge fund trading boosts the market because they command swaths of cash.

Bond funds, however, remain the asset class of choice since 2009 with investors lunging after yield despite near-record low bond rates. Since the credit crisis, investors have shoved more than $430 billion dollars into bond funds.

Through June 30th, U.S. domestic mutual fund stock flows have seen a negative $17 billion dollars of outflows compared to a net $119.6 billion dollars of bond fund inflows. During the first half, bonds gained about 6% and stock declined 7.5%.

The table above, courtesy of Morningstar, is outdated since it's only through January 2010. But the reason why I've included it is because we've got a full picture of mutual fund flows in 2009 and 2008.

Despite a net $25.7 billion dollars of redemptions in 2009, the U.S. broader market gained more than 22%. Indeed, these and other dollar amounts are small compared to the size of hedge funds and other large institutions trading stocks daily. Yet from a sentiment gauge, rising net outflows of domestic stock funds this year can be viewed as a contrarian indicator because investors usually get their timing wrong.

The one variable bothering me the most as a bear on the economy is the fact that individual investors are not participating in the post-March 2009 rally. They're still unloading equities. In the late 1990s, individual investors purchased almost 75% of their total stock fund contributions in the last 24 months of the bull market, which ended in March 2000. In other words, stock fund sales came largely towards the end of the party.

The same phenomenon is probably going to happen to bond funds. The ongoing avalanche of net inflows since late 2008 will draw to a violent end eventually, just like the previous bubble in technology stocks did in the late 1990s.

The massive and seemingly never-ending tidal wave of bond fund inflows is indicative of a bubble in fixed income securities for no other reason, except the trends underway in bond mutual fund flows. The individual investor is a good leading indicator of trends, which always become overbought and, ultimately, violently discredited. If this is the case, then stocks are not about to crash again but, at some point in the future, bond prices will.

Bonds and Gold Strange Bedfellows in 2010

Montreal, Canada

Can deflation and inflation assets co-exist? Can both assets rally in unison, despite harboring completely divergent asset class outcomes in wildly different economic environments?

Since the onset of the credit crisis three years ago, more often than not, gold prices and Treasury bonds have rallied simultaneously; brief periods showed negative correlations, including July 2008 through November 2008 and throughout most of 2009, which followed a crash in bond yields after hitting their lowest levels since the Eisenhower administration in December of 2008.

After seven months of trading in 2010, gold prices and U.S. benchmark ten-year Treasury bonds have exhibited a higher correlation than historical behavior would suggest. That's bizarre market action because gold acts as a traditional inflation hedge while bonds are regarded as primary winners amid accelerated disinflation (e.g. 1990s) and deflation (e.g. 2008, 1930s). It's almost like cats and dogs enjoying each other's company when we all know they don't get along.

Through July, gold and bonds have rallied together in five out of seven months with January and July the only disconnect. Both asset classes also rank as one of the few investments to rise in a tough market this year; Treasury bonds have gained 6% this year as measured by the Vanguard Total Bond Fund and gold prices are up about 7%.

Perhaps a greater explanation for this largely positive correlation in 2010 lies in the growing fear that we're entering outright deflation again. Gold is a store of value in uncertain economic times – including price deflation. It's simply not true that gold must decline as nominal and real prices fall in value.

Consumer prices remain in positive territory in the United States but just barely with June CPI up 1.1% year-over-year. But in Europe, a few countries are now experiencing negative inflation or deflation, including Ireland and Spain. This is consistent with the resultant effects of housing deflation in these countries and, increasingly, it appears to be spreading to the United States.

Bubbles in housing, however, remain in Canada, Australia and parts of China.

Gold, which now commands the attention as a surrogate currency in the age of rapidly rising government deficits and weakening fiat currencies, is showing its metal (no pun intended) as a store of value as governments flood the system with debt obligations. It's also noteworthy to mention that broader monetary aggregates in the West and Japan have literally fallen off a cliff this year – again, a deflationary event suggesting central banks are losing the war on credit growth and rising inflation.

Gold, contrary to popular wisdom, is rising in a deflationary environment just as it did in 2008.

High quality bonds and gold are the new anomaly this year. Both assets should harbor a strong negative correlation but, instead, appear to be running together. I suspect this odd relationship will continue until the bond vigilantes attack Treasury, at which time I expect gold prices to head off to the next solar system or, what I would term, the "meteoric phase." That'll mark the endgame of the "flight-to-safety" trade in T-bonds and the nadir of the secular bull market in gold.

Bonds Versus Stocks: 2010 to 2020

Montreal, Canada

What would you rather own over the next ten years: Stocks or bonds?

A dividend yield of 4% per annum, or 48% compounded, from now until 2020 looks mighty appealing compared to staid bonds after a massive 30-year bull market.

Unless we face a long and drawn-out Great Depression II, then stocks should easily outpace bonds over the next ten years. Combined with dividends, which are pretty attractive on some of the largest global multinationals -- stocks offer better inflation-adjusted returns and far greater value.

But let's be clear about the current state of the American economy. This is not the time to be lunging after aggressive capital gains or even stodgy blue-chip stocks paying fat dividends. For my U.S. managed accounts, I've recently purchased Coke (KO), Johnson & Johnson (JNJ), Statoil ADR (STO) and Reynolds American (RAI). Cash remains high at 30%.

I'm buying blue-chips lately but continue to keep my powder dry because we'll experience more market dislocations this fall and in 2011 as uncertainty grips financial markets.

Economists and most analysts have failed to appreciate the state of this economic recovery and continue to compare this growth cycle to previous recoveries since WW II; that is the wrong way to analyze this post-2008 growth cycle because it remains deeply fragmented and impaired by a sluggish job market, contracting or tepid bank credit and a free fall in the U.S. money-supply as measured by M2. Let's not forget this Great Recession was triggered by a credit crash.

This is not your typical expansion because, unlike previous post-WW II recoveries, this one isn't being accompanied by bank credit growth; in the absence of bank lending or loan demand, it's pretty hard to build a bullish case for a highly leveraged economy that's still in the process of winding down debt, building savings and consuming less goods and services. It's also running out of gas lately because government stimulus is just about exhausted.

I still like Treasury bonds for two reasons. Firstly, everyone I know hates them, which makes me believe bonds are still largely a contrarian bet even though investors have dumped record amounts of cash into bond funds since 2009. In the late 1990s, investors raced into stock funds and that party kept on going until March 2000. The same can happen in bonds. We're only in the second year of bulging bond fund inflows.

Secondly, it's hard to argue with the rising forces of deflation or, at the very least, accelerated disinflation since May. The economy just doesn't have the juice it needs to build a sustainable growth path and, at this point, government stimulus is over.

However, bonds are in the 8th or 9th inning of their historical bull market. At some point, banks will start lending and that's when inflation will burst. Bonds will rank as one of the best shorts in history. Anyone holding bonds must watch them like a hawk.

Bonds still have one last hurrah – unless you're expecting an economic boom in 2011. I'm certainly not. And if that's true, then Obama is a one-term President and bond yields are heading to 2% or lower.

Sell into Rallies

Montreal, Canada

Sell 'em when you can, and not when you have to. This morning's strong opening is the first positive session in more than a week and I plan on reducing my equity exposure – already near record lows in terms of overall asset allocation.

Over the past few weeks, a blizzard of economic data in the United States strongly implies a softening economy over the second half of the year. Virtually every indicator since May has shown a marked deterioration, including employment, housing, consumption, consumer confidence, auto sales and the highest office vacancy rates in 17 years – suggesting employers don't plan on a hiring binge any time soon.

Worse, credit indicators have also deteriorated since May. Credit spreads across the board have blown wide open, especially the difference between short-term and long-term interest rates. The rapid compression of the Treasury yield-curve is flashing a warning sign to investors just as it did in late 2007; the difference between ten-year and two-year rates has crashed from 282 basis points on March 31 to 235 basis points this morning. That's a big drop.

But it's not just the United States that's showing signs of a slowdown. I think we're only at the beginning stages of a multi-year collapse in Chinese real estate values – clearly at absurd levels and, for the most part, completely out of reach for the average Chinese buyer. Chinese manufacturing has also slowed since April coupled with a marked decline in the country's trade surplus. The Shanghai Composite Index is down more than 23% this year.

If the assumption is correct that corporate earnings are too optimistic over the next six months then stocks are still overvalued. The S&P 500 Index yields a lowly 2.1% -- hardly a bargain. And if that's true then investors should use any intermittent rallies as an opportunity to get out of Dodge and sell stocks.

To be sure, many large-cap stocks do trade at attractive multiples this summer. I discussed this at length yesterday. Dividends for some of the largest S&P 500 companies are anywhere from 50% to 100% higher than the yield available on the broader market. Still, cherry-picking at these levels probably isn't a bad idea but the investor must make purchases with the intention of doubling-down over the next several months as stock prices head lower.

We're living in extremely dangerous economic times. The bulls might use this pessimistic view as fodder to build the case for a resumption of the post-March 2009 cyclical rally; I certainly do not. The bond market is much smarter than the stock market and it's telling investors that big trouble lies ahead, probably in 2011.

Since I'm a horrible market-timer and a big bear anyway, I'm using any rallies to sell stocks and, instead, raising cash reserves. Stocks are barely 10% of my portfolios.

For my U.S. accounts, I'll be adding to Treasury bonds on any correction – probably in conjunction with a rally in stock prices. I'm especially drawn to long-term T-bonds and strip or zero-coupon bonds, which should rally sharply as we surpass the December 2008 yield levels. It's deflation first, inflation later. This makes high quality bonds still attractive.

My European accounts, however, are heavily invested in some of the best risk-adjusted CTAs in the world – mostly based in London, Rotterdam and Zurich. CTAs, or diversified managed futures funds, have been mired in a draw-down since last year and should be aggressively purchased at these low levels since they have always shown a negative correlation to stocks amid severe market breaks. In 2008, CTAs gained an average 16%.

At some point over the next 24-36 months, I suppose, stocks will be the greatest value-based investment in a generation. That's when I plan on selling bonds, managed futures (CTAs) and unloading some of my gold. From now until then, however, this is a time to be very cautious ahead of great danger.

I'm en route to the Freedom Fest in Las Vegas tomorrow morning for The Sovereign Society. I'll be back on Thursday. Dugald will provide his insights on the technical picture for stocks on Friday.

 

Listen to Bonds

Montreal, Canada

Since the emergence of the credit crisis almost three years ago (August 2007), I've been glued to global credit barometers. Bonds provide far greater clues to the future direction of the primary market trend than common stocks and basically dictate the direction of the latter, as we soberly discovered starting in late 2007 and throughout a dreadful 2008.

Admittedly, like many investors who predicted lower bond prices this year amid an avalanche of Treasury supply and rising long-term interest rates due to a strengthening economy, I was caught wrong-footed. Instead, bonds have rallied sharply – beating stocks for the first time since 2008. Unlike previous economic recoveries following a financial crisis, this one has thus far been lethargic and unimpressive. The market has had enough of waiting and pulled the plug on equities again on Tuesday.

My U.S. managed accounts continue to hold a big position in high quality bonds – mostly intermediate and long-term U.S. Treasury's and strip or zero-coupon bonds. We also hold a big stake in PIMCO Total Return Fund managed by Bill Gross. Bonds are currently 36% of client portfolios and stocks just 10%.

Though I'm not bullish on bonds longer term, there's no doubting that U.S. Treasury securities remain a safe-haven in an increasingly bearish environment for risky assets. Until they're finally discredited at some point in the future, Treasuries are probably better and safer hedging instruments than most hedge funds. They're available to the public, unlike hedge funds, almost always make money when markets crack, unlike hedge funds, and offer low fees and high liquidity – again, unlike hedge funds. That's why for my U.S. investors I prefer high quality bonds and refuse to purchase hedge funds; the majority of hedge funds are basically great businesses for their sponsors but poor investments for their investors. Plus, most retail investors can't buy them anyway because they're only available to accredited investors. And if you do, good luck trying to get out quickly; redemption terms are horrid.

Treasury's provide a great hedge against equities and other risky investments when markets tank. That negative correlation proved correct again on Tuesday as Treasury yields plunged to their lowest levels in 14 months. I'm not sure what the average hedge fund did yesterday but I'll guess they lost money. Most hedge funds don't even hedge yet alone command a skill to navigate through turbulent financial markets. The sector declined 19% in 2008 – not exactly shrewd hedging.

The trend now is renewed deflation fears as a host of economic data since late May portend to a softening economy; it's fair to assume at this point that the United States is slowing and the markets are discounting a moderation of growth over the next several months. Bond yields at 2.97% don't imply an inflation problem or accelerating economic growth. TIPS, or Treasury Inflation Protected Securities, now yield 1.88% after adjusting for the nominal yield on ten-year Treasury bonds. That's the lowest yield in more than a year and indicative of accelerating disinflation or worse, deflation.

Listen to what bonds are telling investors. I'm not sure stocks are dead money yet since another rally might be in the cards before 2010 is over. I would use future rallies to get out of Dodge. The bond market is flashing a big warning sign and investors would be wise to heed its advice. Wait for a correction in bonds or higher yields before buying or adding to your fixed-income holdings; bonds are overbought at these levels and will pull back as equities muster another rally.

Tomorrow is Canada Day and financial markets here are closed. I'll be back on Friday.

Banks Still Hoarding Cash, Money-Supply Contracts

Montreal, Canada

If you're looking for an indicator to confirm the legitimacy of the bond market rally since April, then look no further than money-supply data. The U.S. economy is stuck in a rut; if the trend in loan contraction continues, a recession or a double-dip is almost unavoidable.

According to The Wall Street Journal (June 24), U.S. banks continue to rein in lending.

Since January 2010 bank holdings of Treasury securities have risen 3%. That's been a terrific trade this year for the banks as bond prices have rallied sharply following a dismal 2009.

Benchmark ten-year Treasury bonds are at the cusp of touching the 3% level – a psychologically important number for the markets. The recent thrust behind T-bonds is the apparent new bust now underway in distressed housing after a series of bearish data since earlier this month. The numbers are pretty bad; mortgage refinancing activity has collapsed, new and existing home sales have tanked and foreclosures are again rising.

Meanwhile, commercial and industrial loans have declined by 4% and real estate loans have contracted by 2% since the beginning of the year. This is not the kind of data that supports a sustainable economic expansion. In every post-WW II economic recovery coming off recession lows, the American economy was supported by credit growth as businesses and individuals consumed credit or grew debt. That's just not happening since the economy hit a trough in late 2008.

Over the last four weeks the much feared "deflation" word has surfaced again – the first time we're contemplating an environment of falling prices since early 2009. But the sad truth is that since 2000 we've been mobbed by bear markets deflating asset values across swaths of assets, including technology, real estate, commodities, collateralized mortgage-backed securities, global equities, distressed debt and convertible bonds. That's a pretty impressive list. From their respective all-time highs these and other risk-based assets remain 25% to 50% below their highest values over the last decade – some even deeper in the red. This, in a word, is deflation or the destruction of asset values.

Until banks start lending again and borrowers start demanding more credit, the broader monetary aggregates in the United States and in Europe will remain weak. There's no grease being applied to the wheels. Contracting money-supply means central banks are losing the battle against inflation – a commodity in desperately short supply. Central banks must print. Time is running out at exactly the same time they are being forced to withdraw fiscal stimulus. Increasingly, the bond market is correct as it discounts a deflationary scenario now unfolding in the West.

Have a nice weekend. See you on Monday.

Buy Stocks After IMF Rescue

Montreal, Canada

Buy when there's Blood in the Streets…

A recent study courtesy of Montreal-based Bank Credit Analyst (BCA) suggests that previous credit crises followed by International Monetary Fund (IMF) rescues have accorded investors big gains in local stock markets.

BCA examined several rescues in the 1990s with Mexico, Russia, South Korea and Indonesia as case studies. In all examples, stocks posted huge double-digit gains within 12-18 months of the IMF rescue packages.

In Moscow, the RTS Index has gained more than thirty-fold since hitting a low in late 1998 after the ruble was devalued and Russia defaulted on its GKO bonds or foreign-issued bonds. That year also marked the trough for crude oil prices, which briefly crashed to about $10 a barrel before forming a secular bear market low. Russia, a major net dumper of raw materials in the 1990s, has been a huge beneficiary of the ongoing post-2002 commodities bull market.

South Korean stocks followed a similar trajectory amid the Asian financial crisis of 1997-1998, which smashed local currencies and stocks. Stocks in Seoul have gained a cumulative 500% since hitting a low in 1998. The same is true for other regional bourses in late 1998. If an investor purchased Asian stocks (excluding Japan) in late 1998 the profits 12 years later would be enormous.

In the United States, stocks hit a 12-year low in March 2009 and have since rebounded about 80%, according to the S&P 500 Index. The worst credit shock and collapse since the 1930s drove many stocks to absurdly low levels – especially banks.

But the jury is still out on whether the S&P 500 Index really hit a bottom in this cycle at 676 or just an intermittent low in the context of a cyclical bear market. I tend to believe this remains a bear market rally within the confines of a cyclical bull market. The financial and tax landscape in the United States starting in 2011 won't necessarily support a bull market in stocks as tax rates rise, the Fed finally starts hiking interest rates and an avalanche of refinancing hits speculative-grade companies. This is not 1981 or the Reagan Revolution. Obama is not an investor's friend.

The point is, however, that bottom-fishing amid a crisis can pay-off.

With the European Central Bank (ECB) and the IMF effectively bailing out Greece and trying to deter speculators from attacking other weaker peripheral EMU countries, the notion that Europe is "dead" and wrought with nothing but currency failure is unconstructive. Many large-cap European companies will benefit from a sharply weaker EUR and are worth nibbling at these levels. The Club Med belt, including Greece, Spain, Portugal and Italy harbor some good companies that have been massacred over the last several weeks.

To be sure, Europe is not out of the woods by a long shot. EU and IMF-imposed austerity measures won't result in a boom for a long time as spending is severely curtailed and deficits reduced to comply with loan disbursements. Yet if history is any guide, it can pay to buy into distress following IMF intervention.

Some Bonds Shine in Market Panic

Montreal, Canada

Whatever yesterday was for investors it wasn't the Big One. Greek debt fears and an electronic trading glitch in New York knocked stocks down almost 1,000 points late in the afternoon shaking investors worldwide.

In the end, it looks like this might be a correction and nothing else. But it does serve to remind investors that the post-March 2009 low is looking vulnerable and that the "easy money" has already been made.

Investors want to see cash heading into Greek coffers – and fast. Germany's lower house passed a bill to fork over $29 billion dollars to Greece. The Germans have been reluctant to commit to a Greek bailout and rightfully so. Yet a Greek default would be quite painful for Germany's banks – the biggest lenders to Greece. The French and Italians also have big stakes.

In this environment of heightened risk aversion it certainly makes good sense to have gold. Prices surged on Thursday. Gold is outside of the credit system – unlike paper money and bonds – and harbors no liability. It's debt-free and liquid.

At this point, it's quite obvious that the global exchange rate system is dysfunctional, major government bond markets are in a state of flux and stocks hostage to events affecting credit.

As for bonds, they still belong in a diversified portfolio. Aside from gold, bonds of the highest quality posted positive returns on Thursday. But "which" bonds should you own? There's a ping-pong match going on whereby investors are jockeying between sovereign markets trying to park cash in a world that's growing increasingly jittery about government deficits.

The only government bonds I'd hold now are U.S. Treasury's and German bunds.

However, a mixture of high quality paper should also include some emerging market debt, corporate bonds and TIPS. Most of these securities gained in value in yesterday's panic. Remember to keep your effective duration short.

Alternatively, Bill Gross has a handle on how to run a fixed-income portfolio in the age of violent capital markets and rising government debt contagion.

I like the PIMCO Total Return Fund – still beating the markets over the last decade and with far less risk to capital than common stocks. Gross is up 4.2% this year compared to 1.8% for the S&P 500 Index. His effective portfolio duration has shrunk markedly over the last several months and should be a staple in all long-term portfolios, especially those at, or approaching, retirement.