Archive for the 'economy' Category



So if the Economy is Recovering, Why Don’t You Feel Better?

The N Y Federal Reserve released the information in the chart below this week.
Two takeaways:

  1. 1. Overall consumer debt is rising, but still below record highs set in 2008. Presumably this is a good sign as consumers theoretically only borrow when they feel confident about the future. Wall Street analysts apparently don’t understand the concept of borrowing because there is no other money available to buy stuff…like food.
  2. 2. Student loan debt is at absurd and unsustainable levels. Trouble is most recent college grads don’t have a lot of money to invest, so Wall Street likes to ignore this stat too.

But if you look at the numbers, student loan debt is 125% of all auto loan debt. Considering that most Americans own a car, and only 33% of Americans age 25 to 29 have a college degree the debt per college grad is crippling, considering that cars and thus car loans, aren’t cheap.

chart

What to watch for:
Before we talk bailouts and defaults watch for Wall Street to start bundling and selling pools of student loans to investors. The Government will say what a good idea this is, and investors will feel patriotic as their investments will help fuel more lending and more debt to unsuspecting future college grads. Then wait for the defaults and the billions of dollars retirees will lose out of their retirement accounts. Won’t happen? Just substitute “mortgage” for “student loan”. History really does repeat. (And just as a warning – student loans are already being bundled for secondary market,  )

Are you just starting out? Saddled with debt? Trying to save, pay off debt and live a little all at the same time? If you need help, give me a call and we can get you started with a lifetime financial plan.

My Morning Read

Heading into the weekend the markets have been a little shaky over soft economic news from China and apprehension over the Crimea vote this weekend.

Warren Buffet says – don’t sell stocks over either concern. For now I agree. Probably good advice to not look at your 401(k) statements next week, but anything negative should be short term.

Why does Crimea/Russia/Ukraine matter and why you should care? Despite the U. S. administration’s stance that military invasions are so 20th century and unbecoming of a 21st century leader, the reality is that there are many geographic hot spots in the world of today and tomorrow. Whether over oil or just as likely in the future; water there will very likely be other countries that will want to expand their territories. Letting one country (Russia) get away with it because no one is willing to intervene is an alarming precedent. I’m not saying there is a good solution, but I’m just hoping that allowing Russia to claim Crimea from a sovereign country (Ukraine) is not the first domino.

A Look Ahead

It’s been a busy year already planning for the year ahead. While 2013 saw a rotation in the stock market from the less risky sectors like utilities and into growth sectors like technology, with the likelihood of slow economic growth ahead I expect 2014 to reverse that trend.

Here is the link to where I discuss in more detail my outlook for the year ahead.

I was also interviewed for an article at wealthmanagement.com entitled “Advisors’ Top 10 Investment Ideas for 2014.” My ideas were picked for two of the “top ten ideas.”

For those of you that actually like my charts, below is a copy of an article that I wrote for horsesmouth.com

2014 Outlook

(Originally published at horsemouth.com on December 27, 2013)

The biggest worry heading into a New Year is that with the market at record highs, it certainly must be overvalued and due a correction.

While a correction might actually be welcome (the pause the refreshes), worrying about whether the market is too high is quite a relief compared to recent worries of the past – financial meltdown, Europe/Euro implosion, China hard landing, U.S. recession/depression… So while anything could happen in the short run, let’s look into the crystal ball and see what we can see.

Technically Speaking

Below is a Graph of SPY, the SPDR S&P 500 Index ETF since October of 2012. Highlighted by the vertical lines are the three recent time frames marked by our seasonal strategy – better known as the Halloween Effect. In short, global market history shows that most of a stock markets’ gains come from the period of November first ( the day after Halloween) through the end of April (when you will hear the phrase “Sell in May and go Away…”). While 2013 proved to be a good year to be in the market – for the entire year, you can see a marked difference in market performance. While the market went up during the entire period, between the second and third vertical lines, you can also see that it did so with more volatility than the period prior, and so far in the period after.

Figure 1 SPY October 2012 – December 2013

chart1
Source: freestockcharts.com

Bottom Line

Technically the market is in a solid uptrend, and until it breaks out of this trend by going up through the top line of resistance, or down through the bottom line of support, we are in a bull market and investors should be taking advantage of it.

Looking at the bigger picture, Figure 2 looks at SPY using monthly returns since 1998. One of the debates about the market is whether we are still in a secular bear market that started in 2000. A secular bear is defined as a market that has reached a peak, declined and failed to rise above and stay above that peak. So in 2007 we breached the 2000 peak, but failed to stay above it. Today we are working on nine months of being above the 2000 and 2007 peaks. The question is can we stay there?

Figure 2 Spy 1998 – December 2013, Monthly Data

chart2

Source: freestockcharts.com

Bottom line – it will take a 17% decline to bring us down to the 2000 high. Given that we are in a seasonally strong period, it’s likely that it will take a full blown official correction of 20% or more to breach the 2000 high.  While 20% corrections aren’t uncommon, more than that is, so barring a macro event as of yet unknown origin (the proverbial Black Swan) I believe we have exited the 2000 – 2013 secular bear and have entered into a new secular bull market.

What about the nearly “new daily highs?”

Below in Figure 3 is the classic secular Bull/Bear Markets graph from Crestmont Research (crestmontresearch.com/docs/Stock-Secular-Explained.pdf). Quite simply in a secular bull market, the market is supposed to record news highs! Note: the folks at Crestmont believe we are still in the middle of a secular bear market.

chart3

Fundamental Data

Is the market too high?

The common mistake our clients make is to think that price alone has any relevancy to whether the market, or a security is priced too high, or too low for that matter. While maybe not the best, the better and most common metric is Price to Earnings Ratio. While there are many variations on the “proper” P/E to use, I like to look at the earnings for the most recent quarter, annualize and use the current market price. Based on information from zacks.com third quarter earnings for 2013 should beat year ago earnings by about 4.9%, putting  third quarter earnings at about $22.25 per share.  Annualized that would be $89.00 a share. Based on the S&P 500 at 1842 we have a current P/E of 20.7. The good news is that the third quarter solidly beat expectations of only 1.10% earnings growth. Bad news is that earnings estimates for fourth quarter are coming down. Based on current estimates of 6.8% YoY growth, actual earnings will decline from third to fourth quarter 2013 – meaning P/E ratio goes up, not down.

Bottom Line

This market really is getting expensive. Not to the eminent crash level, but to a level where it is hard to see huge market gains in 2014. Earnings absolutely have to catch up to current market prices and keep the current P/E at or under 20. Secular bear markets historically start with P/E’s in the mid 20’s so we could see a solid 25% gain from current market levels – and then seriously talk about bubble territory.

The Economy

One of the best data series for predicting economic conditions is the St. Louis Financial Stress Index and the Chicago Fed National Activity Index. Below in figure 4 you can see that financial stress is negative and heading lower (good) and the activity index is positive and moving higher (good). So not only is economic activity healthy and improving, the financial conditions exist to bolster continued improvement.

chart4

Don’t Fight the Fed

While many interpret this as a warning sign with the Fed announcing a tapering of QE III, I see it as a positive. While the U.S. Fed has announced a very modest reduction to QE III, new hire Janet Yellen does not have the history to indicate she will be hesitant to reapply the stimulus at the first sign of economic softness. Plus, the Fed has made a point to reiterate ZIRP policy, well into 2015. Remember that pre-crisis interest rate policy was monetary policy. So we are simply transitioning from extraordinary monetary policy to “normal’ monetary policy. In other words the Fed remains accommodative. And that’s not just in the U.S.

From the Daily Pfennig put out by Ever Bank, “…markets were focused on China and Japan.  Japanese data showed inflation continues to move higher and manufacturing is recovering, but the yen still sold off to 5 year lows.  The cash crunch in China ended as the government injected cash into the banking system.  And commodity prices moved higher helping to boost the commodity currencies. “

Bottom Line

The world is awash in cash, and continuing to get more. The financial crisis led to six years of belt tightening by consumers and businesses, and maybe, just maybe the world is ready to spend again. And just to confirm, Figure 7 shows total outstanding consumer credit – actually looks like we stopped pausing back in 2011.

chart5

What’s it All Mean?

One of the hardest things about market predictions is that there is really only a very loose correlation between economic growth and the stock market in the short run. In 2013 we had very anemic economic growth but an extremely strong stock market. 2014 is looking to be another year of steady if not spectacular economic growth. However the stock market looks to face two strong headwinds. First is the current valuation. To break a 20 P/E ratio there needs to be some feeling of “irrational exuberance” to ignore valuations and move higher. In 2013 the market was driven by some of the big technology names and IPO’s. But I don’t see much room for a sector rotation to undervalued companies too drive the averages in 2014. I did a simple stock screen on finviz.com. The only search criteria I used was NYSE listed stocks (3311 total) and screened for P/E under 15 (long term historic average) and positive earnings expectations for 2014 – not exactly a big hurdle. The results were a list of only 263 stocks. The market is broadly expensive.

Bottom Line

This is not the time to fight the technicals which are very strong. But I would be very wary as we move forward. Any hiccup to the goldilocks scenario that is being priced into the market could lead to a very quick 20% correction. But there aren’t any obvious reasons to return to the secular bear levels (below 2000 highs) and stay there for any length of time. The world is simply awash with cash, and nobody is likely to do much monetary tightening for at least another year.

“What…Me Worry?”

wheres-the-beef

Thought I’d show my age by recalling two iconic figures from the past; Clara Peller’s “Where’s the beef?” Wendy’s ads and Alfred E Neuman’s catch phrase from the cold war days “What, Me Worry?” But they both sum up our current political standoff better and more succinctly than I am able to. But I will spend some time explaining.

First, I apologize for being late to address our current state of affairs. From the calls and emails we’ve received I know that many of you are concerned, as you should be, by current events. However, I am not a believer in saying or writing something just for the sake of talking or writing. It’s taken a bit of time to digest the insanity and determine the best approach. Of course hindsight will be the determinant of the “best” approach, but I think we are taking a rational and prudent approach.

The background. As we are all aware Congressional Republicans and the President are locked into a game of chicken. The impending collision officially comes at after October 22 – when the U.S. government must borrow more money than is currently appropriated to pay our bills. With Congress refusing to up the limit it raises the specter of the government: 1. Shutting down various departments en masse, and 2. Not being able to pay interest on our debt – thus officially defaulting.

Queue here Mr. Neuman, “What…me worry?” Seriously, we will not default on paying the interest on government debt. Period. The consequences are severe. The Chinese, American banks, credit unions, entire European Countries and their banks technically could go bankrupt if the U. S. defaults. Now I could go into details here as to how that works, but that would be a long post and detailed post. Please drop me an email, (bill@401advisor.com) or give me a call (937.434.1790) if you want to discuss details. Seriously. I really do enjoy those conversations!

Now to the real reason we won’t breach the debt limit…Ms. Peller. Representing senior citizens throughout the country, asking “Where’s the beef?” (aka social security check) come November 1. Remember amongst the insanity, our government leaders are elected. And if Ms. Peller and her legions of AARP following social security recipients miss one check, you can be assured that those responsible will never see government office again post their next election. Our Congressmen are well aware of this. The Chinese we can deal with, but don’t mess with a Ms. Peller’s social security check!

Portfolio Strategy
Despite my confidence that we see a pre-November 1 solution, I will never risk client assets based on my personal outlook. I will always try and have a Plan B in place. In this case we have raised our cash positions to about 20% of our portfolios. While I don’t see permanent portfolio damage due to the wrangling, we could certainly see a temporary drop. Cash is available to limit volatility and to be in position for an opportunity buy, if I see such an opportunity. The Plan B, is that the 20% in cash can be deployed quickly to buy a “short” ETF – simply a stock that goes up when the market goes down. A 20% position won’t eliminate a loss, but it will soften the blow. That would be a quick adjustment. We will just have to see what happens to determine where we go to from there. As you should be aware, if things get that dicey, I am perfectly willing to move all portfolios to 100% cash if we have a storm that we need to ride out.

My bigger concern, which I will address next week, is the short term trend in corporate earnings – which hasn’t been good. As we get into the heart of reporting for third quarter earnings we absolutely have to start seeing some optimism from businesses regarding the outlook for future growth and profits. The stock market simply cannot continue its upward trend without earnings growth. That is a very real and more certain trend that will have longer term repercussions for the market.

2012 Outlook

This article originally appeared January 12, 2012 at www.citizen-usa.com. I wanted to post it here as I will start taking a look at how my outlook for the year is panning out, and how I may be adjusting our client portfolios.

After a multi month hiatus, I hope to be back as a regular contributor here at Citizan-USA.com. The last half of last year got a little crazy, both at work and at home. Net, everything was good, just too many distractions to keep up with the blog. On the business front, I did add MarketWatch.com to my writing work. At MarketWatch I write regularly for their “Trading Deck” feature and write specifically on dividend investing and the strategies we incorporate at 401 Advisor, LLC. After 25 years in business, it is nice to be recognized as an “expert” in one of the areas of investing that I am very passionate about.

With that, I have procrastinated enough, it’s time to layout my outlook for 2012. While I’m probably obsessing way too much over this, as no one will really remember a thing in this blog by the end of the year, my current outlook is relevant to our current clients. Our current strategy’s allocations do depend quite a bit on the near term outlook for the markets and global economies. (We’re pretty much “fully” invested, but sleeping with one eye open!).

But first, I have to take a quick look back at January of 2011, and see how my predictions panned out. My “Outlook 2011” article can be found here.

Here are the bullet points:

1. Earnings are key and momentum is positive.
What Happened: Earnings growth stayed strong through the year, but did decelerate.

2. Fed and Federal stimulus would prop up the market.
What Happened: After the early drop, the markets were whipsawed, mainly on the news of the day from Europe. But money printing came to the rescue, this time by the ECB instead of the U.S. Fed, and the market came back to a breakeven point by year end.

3. GDP will come in at 2.5% and “Unemployment will stay above 8% for the next several years.”
What Happened: The Federal Reserve predicted GDP for 2011 would be between 3% and 3.5%. I predicted 2.5%. While actual GDP is not yet known for the 4th quarter, through the first three quarters GDP growth has averaged 2.2%. Latest unemployment came in at 8.5%.

4. Stock market would rally into second quarter, however things got “foggy” for the second half with all the international economic concerns. And investor would likely have to endure a fare amount of pain to realize nominal gains.
What Happened: The market did rise just over 10% by mid-May, however stock market investors had to endure a 20% drop, to finish the year with a virtual 0% return (based on the S&P 500).

So, over all a pretty good track record for last year. But that’s not the purpose of rehashing old news. The point is not to see what was right and what was wrong, but why, and how we can do better for this coming year. So here is my outlook for the year to come.

1. Let’s start with the earnings. Forget all the noise from the talking heads, the stock market will follow earnings. This could be my downfall for the year’s predictions, as earnings are still growing, but at a slower pace. Slowing earnings growth is a red flag and could doom a stock rally before it really gets going.

Prediction: Earnings will be “choppy” but overall positive for the first quarter. However, guidance will suggest optimism for the second quarter. Earnings growth will bottom in the first quarter and then accelerate, albeit modestly into the third quarter.

2. Official Fed Reserve stimulus will be minimal.

Prediction: While the administration will spend what they can prior to the election, very little of any kind of legislation will get through congress. However, the big wildcard is Europe. Greece is a mess, stores are running out of products, pharmacies can’t even get aspirin on their shelves. Greek unemployment will continue to skyrocket. The ECB will be guilted into action and we’ll see their printing presses going at full bore. The ECB stimulus will be enough to keep Europe’s problems from pushing the rest of the globe into a recession…for 2012.

3. GDP growth will accelerate through the first three quarters, back up to the 3% maybe even 3.5% range.

Prediction: After 3 years of subdued spending, pent up demand for cars, appliances, home improvements…consumer spending will surprise most pundits to the upside. Three years of recession, $4.5 trillion in Federal deficit spending, and $2 trillion of Federal Reserve stimulus is enough time and money for the economy to start coming around. All recessions eventually end.

Part of my conclusion comes from talking to local businesses. Dayton Ohio hasn’t made any lists of “Economic Hotbeds” that I’ve seen. But several business people, in very economically sensitive businesses, that I’ve spoken to are doing very well. The biggest problem facing manufacturing is “finding people to show up to work every day, and being sober.”

4. The Stock Market.

Prediction: Through the first three quarters this will be the year of U.S. economic re-emergence. Earnings will be good, stock market valuations are reasonable, and (and this is the big factor), there will be just no other reasonable place for global investors to put their money, other than in the U.S. Certainly not Europe, China will see economic improvement but political turmoil, emerging markets will do ok, but global growth will be too tepid to see a boom in commodity prices that drive most emerging market economies. Expect a choppy market with a modest pre-election gain. We’ll finish the year with a 20% plus gain in the S&P 500.

5. Ok, it’s an election year, so just for fun here is my election wrap up.

The stock market and GDP growth look good through the first two quarters. President Obama’s approval ratings rise enough to quell any movement to add Hillary Clinton to the ticket. However, the U. S. dollar has risen throughout the year, killing exports and causing congressional rumblings about trade sanctions against China. Oil prices are spiking due to the turmoil in the Mideast and third quarter GDP estimates are getting chopped. Republicans campaign on images of Greek riots as “the U.S. future” if we don’t reign in spending. Ron Paul has enough delegates to influence the GDP platform. Voters are just starting to get comfortable with the recovery, and vote for Romney partially due to some “isolationist” type language added to the platform by the Ron Paul camp. Romney wins in a close election. Obama just can’t rally voters for the large turnout he needs for re-election. In hindsight he should have added Hillary. (If Mrs. Clinton does join the ticket, he wins in a landslide).

The one thing I am absolutely certain about, is that this will be another “crazy” year. Things aren’t settling down. We will have plenty of news to digest and argue about on a daily basis.

With that, it’s time to get back to work.

Europe Undercuts the U.S. Rally

Originally posted on horsesmouth.com
As I have mentioned in prior posts, as have most writers commenting on the current state of the financial markets, Europe has been the 500 pound gorilla controlling weekly, if not daily market gyrations. With the announcement of a trillion or so Euro bailout, the markets were free to rally on a solid estimated domestic GDP growth rate of 2.5% for the third quarter. The unexpected part is the latter, despite what has been weak, (if not awful) economic data, GDP certainly indicates that we have sidestepped a double dip recession, as long as the European solution is in fact a solution, and not just a solid kick, kicking the can further down the road.
So let’s take a look at the charts and see where we are.
First a look at SPY shows that we have not only broken out of the trading range established in August, but have also broken through the very key 200 day simple moving average (SMA). With the year’s previous high just 6% away look for a new 2011 high in the very near future, if the market’s reaction to the Euro deal remains positive. Anew trading range between the current level and prior high around 136 would be a healthy pause leading to a Santa Claus rally to finish the year.  At the same time keep an eye on the former resistance line around 123. Any drop below, would likely come from the Euro agreement falling apart.
Chart 1. Spy 2011 YTD
Next a quick look at JNK shows a similar pattern. A slight negative is that JNK actually turned negative on Friday the 28th, while SPY was able to follow through on through on Thursday’s news. This could have more to do with the drop in Treasuries as much to the positive GDP release then any lack of follow through to the Europe news. While a move to new highs for SPY would not be a surprise, JNK will likely be pressured by the potential for inflation/rising rates brought on by the bailout. JNK looks way over bought relative to its 30 SMA (Yellow Line) and a current yield of 8.55% (yahoo.com/finance as of Sept 30, 2011) seems fair to low depending on any further rise in Treasury rates.
Chart 2. JNK 2011 YTD
In Chart 3 you can see that the VIX also gapped down to coincide with Thursday’s big up day. While way down from its recent trading range, it is still at the top of the range established in the first half of the year when we saw a solidly rising market.

Chart 3. VIX 2011 YTD

Source: http://www.freestockcharts.com

Next a quick rundown of fundamentals. In Chart 4 you can see a history of the Kansas City Financial Stress Index (KSFSI) and the Chicago Fed National Activity Index (CFNAI). While both are in “bad” territory (Positive financial stress and negative activity index) they are not quite at the levels that have predated the last two recessions.

Chart 4 KSFSI,CFNAI and U.S. Recessions


Source: St. Louis Federal Reserve FRED

However, when we zoom in, in Chart 5 you can see that the two indicators are heading in different directions in terms of indicating an improving economy. While the Chicago Activity index rose over the last month, so did the financial stress index. The theory behind the two indexes is that economic activity will be pulled lower if financials stress continues to increase.

Chart 5 KSFSI and CFNAI January 1, 2011 – September 30 2011


Source: St. Louis Federal Reserve FRED

On this note, I have to throw in one slightly troubling chart. While earlier I noted that the absolute drop in JNK could be the result of rising level of interest rates. However, in Chart 6, we see that the bond market was not as enthralled with the Europe Solution  as the stock market. The TED spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt (“T-bills”). In Chart 7 you can see that the spread continued to rise through the market rally of the last week. The implication is that banks are even less reluctant to lend to each other now, then they were a week ago. This is not a good omen for future releases of the KSFSI.

Chart 6 TED Spread


Source: Bloomberg.com

But not to end on a sour note, I’ll finish with the prior graph of the CFNAI and KSFSI, but this time throwing in GDP in Chart 8. This is the source of my renewed optimism. GDP is at the highest level it has ever been.

Chart 7 CFNAI,KSFSI, and GDP


Source: St. Louis Federal Reserve FRED

And yet, as we see in the final Chart 9, SPY is still well below prior peaks in both 2000 and 2007. In fact we are at levels first seen in 1999.

Chart 8 SPY Monthly from 1996 to present


Source: http://www.freestockcharts.com

Putting it All Together
Not surprisingly the Europe Solution is being scrutinized and the analysis is not as positive as the initial reaction. There are certainly some big holes. Seriously, who is going to step forward and “voluntarily” accept a 50% haircut on Greek bonds? And while there is to be a trillion Euros available to recapitalize European banks, where exactly will it come from, and at what price? At this point the stock market is only a couple percent positive on the year and trading at a modest 13 times earnings. Not where you’d expect a “euphoric” market to be.
But what this appears to have accomplished is to buy significant time. Time for Europe to put its financial house in order. And as long as we can see some sort of begrudging movement, it leaves room for the U.S. to move up (or down) based on our own fundamentals

Investment Policy
With the important 200 SMA breached to the upside for SPY, our modified trading signal will have us wait a few days to see if it holds. If so I will move our ETF Growth Cycle Portfolio into higher beta ETF’s to take advantage of the seasonality cycle that favors the November to May period. Our dividend portfolios have been fully invested since around the time JNK crossed above its 30 day moving average. For new accounts in cash, I will be scouring our targeted dividend stocks for stocks that have not fully recovered from last quarter’s sell off. Even if ( and it is a big if), Europe is out of the way for now, a muddle through economy still looks probable. I like the idea of generating return through dividend yields.

A look at the news…

I ran across a couple articles in the news this week and thought I’d pass them on. Then finish with a quick market outlook for this week.

In the, “I have some good news…and some bad news…” category, this is from Seeking Alpha,

Strategists See Biggest S&P 500 Gain Since ’98
Wall Street strategists say the Standard & Poor’s 500 Index, after falling within 1 percent of a
bear market this week, will post the biggest fourth-quarter rally in 13 years even after they cut forecasts at a rate exceeded only during the credit crisis.

The benchmark index for U.S. stocks will climb 14 percent from yesterday to end 2011 at 1,300,according to the average estimate of 12 strategists surveyed by Bloomberg. The last time they were this bullish in October was 2008, when the group predicted a 27 percent gain and the index lost 18 percent.

So analysts just cut the crap out of projected third and fourth quarter earnings, but still predict a huge rally. Wow, and you wonder why people support the “Occupy Wall Street” rallies?

On a lighter note, there was this from MarketWatch: “Why Geezers Give the Best Investment Advice” In the article they site another article entitled “What is the Age of Reason?” that concludes that “…middle-aged people make fewer mistakes with finances than those that are younger or older. The research even pegged the optimal point in life for handling money-related decisions: 53…so the next time you talk with a financial advisor …instead of asking about investment performance, you might want to ask, ‘How old are you?’” Interesting to note that of the four authors, the oldest was forty.

Must say, although I’m a bit offended at the “geezers” reference I couldn’t agree more with the study’s findings. (note: I was born in 1957)

What to Expect from The Week Ahead
Looking at a chart of SPY (the S&P 500 Index ETF), there are three things to take note. First, the fairly horizontal yellow line is the 200 day moving average. Very simply we are still in a secular, or long term bear market until the market crosses back above this line. History shows that it is prudent to be careful while the market is trading under the 200SMA. The two horizontal lines show the trading range the market has been in since this spring. While SPY broke through the bottom line (support) for a day it did finish the week back within the trading range. However, the yellow arrow shows where the rally last failed to rise up to prior resistance (the upper line) and headed downward again. The last set of parallel lines slope downward and may indicate the start of a new downward movement.


Looking ahead for the week, what we don’t want to see is SPY dropping below the horizontal support line –around 112 for SPY or 1120 for the S&P 500. Breaking below 107 would be a likely confirmation of the new downtrend. Ideally we rally a little on the week and head back up to the 122.50 range, and at least confirm the trading range. Earnings season kicks off on Monday. The Kansas City Fed also releases its financial stress index for September, (more on that after the release).

Bottom line? Defense still rules, until the market rallies above the 1225 level on the S&P 500.

It’s really is all about Europe

Just in case there is any doubt left that the market is 100% about what is/will happen in Europe, take a look at today’s action in SPY, the SPDR’s S&P 500 index ETF. The market initially followed through on yesterday’s positive note with a nice gap open of about 2%. The news over the weekend was that Geitner had convinced the powers that be in Europe, that the only solution was the “bazooka solution” – a one time massive stimulus in the 2.5 – 4 trillion Euro range.

Yesterday, (Tuesday) in mid afternoon, the Financial Times reported that an agreement had not only NOT been reached, but there were major areas of disagreement. The markets gave up most of the day’s gain in about a two hours, before posting a slight rebound before close.

Chart from freestockcharts.com

That is two 2%+ moves in one trading day. And only on bits and pieces of rumored news! This market will either blast off, or fall like a lead balloon once we have real news on what, if anything the EU plans on doing with their members’ sovereign and unpayable debts.

I just want to caution, strong bets in this market are truly 50/50 propositions. No one knows what the outcome will be at this point – don’t be fooled by those pretending they do. Be careful, there really will be better times to make money.

Too pessimistic?

I received quite a bit of feedback on my September 9th blog. So for those of you who think I am way too pessimistic, you may want to view this video for a refreshing take on the European crisis as expressed by a trader in an interview on the BBC.

Now is Not the Time for Risk

Yesterday I received a “query” from a writer for the Wall Street Journal’s online edition for information on a story. A “query” is typically sent out by a writer looking for an expert opinion. For this query the writer was asking for suggestions on ways that a near-retiree could add risk to their portfolio, in an effort to boost returns. The idea is that so many retirees have suffered such poor investment performance for years that soon to be retirees need to play a little “catch up.” My response was basically that that was one of the stupidest ideas I had ever heard! So assuming I won’t be quoted in that piece, and there is no reason to wait for the article to be published, let me share some thoughts on this subject.

Investors (and apparently financial writers at wsj.com) have been misled on what risk is, and how it affects portfolios, for years by the mutual fund industry and the financial planning community. The theory goes that by increasing the risk of a portfolio, the investor also increases their return. As if this is a foregone conclusion. But if that is the case than where is the risk? If by definition you change investments and you, by definition increase return, than there is no “risk.” So everyone would be stupid not to have “high risk” portfolios. Heck the more the better, let’s dial up a little more “risk.” Just turn up the heat on the oven and the bread will be done sooner. Right?

Last night I was watching Extreme Pawn Stars. If you haven’t seen the show, it’s about a pawn shop in Detroit. It offers entertainment on two levels, first it’s interesting to see the stuff that gets brought in, and second the characters that bring in the stuff! Last night, this guy brings in a Cabbage Patch® doll and wants $100 for it. The pawn shop owner asks him simply, “How did you come up with that number?” His answer, now pay attention here, was, “Because I’m being evicted and need $100.” The store owner offered him $10. The moral of the story is that neither the pawn shop owner, nor future buyers for the Cabbage Patch doll, really care that this guy needs $100. The just want to pay what the thing is actually worth. $10.

This made me think about the whole premise behind the query from the WSJ writer. Investors, for whatever reason, think there is a correlation between needing a higher return on their investments and actually getting a higher return on their investments. The fact is the “market” doesn’t really care that you, or any other investor actually needs anything. And just because an investor needs a high return does not mean that there is some dial that can be turned to turn up the returns as well. The sad truth is, neither owner of the pawn shop nor the market, really cares what anyone needs for their Cabbage Patch doll, or from their portfolio. Each is worth exactly what someone else is willing to pay for them. No more, no less. Personal circumstances just don’t matter.

I will go a step further and explain that this is the difference between the professional investor and the amateur. The amateur is always “long” or fully invested, expecting high returns, because they need those high returns. They typically take risks, at the wrong time. The professional understands that just because he or his clients need return, it is not always possible to get them.

I’ll close with a sad but true example. Almost exactly a year ago, my partner and I went out and made a proposal to manage a company’s pension plan. They had lost a lot of money in the plan and had to add $1 million from the company account to the pension plan. I recommended using our dividend value strategy. In a shaky economy dividends would add stability and provide cash flow to pay out benefits down the road. The owners were noticeably upset that they had lost a significant amount of money and had to now fund the losses. I thought this was a prudent strategy. Instead, the owners went another direction. Determined to “make up” their losses they went with a rather high risk/high return strategy (in their minds) choosing a “specialist” in small company stocks for their existing balance, and self-directing $1.4 million equally divided between Wells Fargo, Citi, and Bank of America. In their attempt to catch up, because they needed the return, they have lost probably another million dollars in 12 months. Instead of catching up, they will need to somehow find another $1 million from company coffers, in this economy, to fund their pension plan or risk penalties from the Department of Labor.

Turning up the heat on the oven is more likely to result in burned bread, instead of simply finishing it sooner. Similarly turning up portfolio risk is a good recipe for being burned as well. In baking and investing, patience is truly a virtue.


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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