Archive for the 'retirement investing' Category



Rally or Top?

The markets have had a very nice rally since mid July when Mario Draghi, ECB Head, gave a speech indicating that the ECB will do “whatever it takes” to keep the Euro together.

This week has brought a modest pause to the advance. The question now becomes, “Is this a pause, or the beginning of the end to the rally?” Unfortunately, in today’s politically charged environment judgment can be clouded. And global events certainly add an additional interesting backdrop for today’s investors.

The chart below is from http://www.chartoftheday.com. The chart plots all major market rallies of the last 111 years. Each blue dot represents the rally’s total return and the length of the rally. The “You Are Here” dot is in the bottom left corner.

The question I am asked frequently is whether the market is “too high” since we are approaching all time highs. From the chart below, it is evident that, by historic market rally standards, this rally has just begun.

Unfortunately, investing is never that clear cut.

If you look just above the “You Are Here” dot, you’ll see the label for “2002”. The post “tech wreck” rally was slightly less in return and slightly longer in duration than where we are now. And as we all now know, the 2002 – 2007 rally ended most unhappily.

Conclusion: If this is another “Bear Market Rally” i.e. Similar to the 2002 – 2007 rally, we are likely looking at an over extended market.

But if this is truly the beginning of a new market cycle, then we are just at the beginning.

Over the weekend I’ll work on a new post outlining our current strategy as we head into the years final quarter.

Bottom Line: There is plenty of time for patience to pay off. Being conservative is not such a bad idea. More aggressive investors might want to start looking at building there “market rally” portfolio, if they haven’t done so already. With cash on the sideline, I think it would be prudent to see how earnings season plays out before committing. If in the market, I’d plan an exit strategy now

Investment Outlook – September 2012

Our portfolios have lagged the overall market since mid-June when the recent market rally started. The portfolios have continued to hold our “low beta” selection of dividend paying stocks and ETF’s.

The rationale to remain in “coast” mode is that it is my opinion the rally has been primarily fueled by Mario Draghi’s comment that the ECB stood ready to take “any action necessary” to preserve the Euro and by extension the EU, including Greece. The problem is that the ECB does not have the authority to follow through on such statements. Simply put, the ECB is prohibited from “printing” the money they would need to implement a U.S. style round of quantitative easing (QE). It is pretty well accepted, that absent such action, there is just not enough economic backing to backstop the financial bleeding in Europe.

The bull argument continues with the “bad news is good news” theme. With China’s economy softening, U. S. economic data “softening” at best, the economic stage is being set for a global simultaneous easing from China, the U.S. and Europe.

The best bull argument is that things are getting worse, so there has to be Fed intervention which would fuel a global rally. I am not willing to buy into that scenario. However, if we actually see such action come to fruition, we will change the look of our portfolio, jump on the bandwagon, and look for higher beta (more aggressive holdings) to capture gains if the rally truly emerges. With the risk to the markets extremely high if such hopes don’t materialize, I will wait for the Central Banks to literally “show me the money” before making a commitment with client’s hard earned investment dollars.

Below is a screen shot from covestor.com comparing my Dividend and Income Plus Portfolio (Dark Blue line labeled “Manager”)to the S&P 500 for the prior 90 days. While the underperformance is clear, so should be our lack of volatility. In fact the portfolio sports a beta of .63, or a volatility measure of 37% less than the S&P 500. And even with our 20% cash position, the portfolio is sporting a very healthy 4.5% dividend yield.

 

Combining the low volatility with the dividend yield, we are extremely happy with our overall performance, especially for the risk adverse income investor, such as a current or near retiree. Furthermore looking at the graph below, again from covestor.com, I zoom in our recent performance.

Since the recent market peak on August 17, the portfolio has outperformed the market by .7% over just two weeks.

Our ETF Seasonal Growth Model has had similar relative results.

Mario Draghi has “leaked” his plan for ECB bond buying and the reaction has been a big yawn. I expect September to be a volatile month and expect to close the recent gap in relative performance with the S&P 500. Primarily by maintaining value while the S&P 500 corrects.  I hope to be true to our motto, “It is not what you make, but what you keep that matters”.

Looking a little further out I do expect the post election rally. I have picked more aggressive investments to rotate into our portfolios if the rally does materialize. Until then patience is prudent.

Individual performances will vary depending on timing of investments, withdraws, specific holdings and allocations. Past performance does not indicate future results. All investing involves risk. Please consult with your financial advisor on suitability of any investments specifically mentioned prior to investing.

It’s All About the Bazooka

The markets have been rallying since June 26th when Mario Draghi, the ECB President, announced that the ECB would do “ whatever it takes” (or as Wall Street terms it “will bring out the bazooka”), to save the Euro. Add in the fact that August has been the number one month for the NASDAQ and Russell 2000 indices in election years, and this month’s rally has come as no surprise.

But remember in investing, it is not what you make but what you keep that matters. The following is from Megan Greene, of Roubini Global Economics, and reprinted in John Mauldin’s “Outside the Box” Newsletter.

As usual, this has been a lazy August, but we do not expect the quiet to last. Indeed, for the second September in a row, developments in the eurozone (EZ) have the potential to be highly dramatic.

Greece: The troika is due to return to Athens in September and make a ruling on whether to release additional tranches of funding to Greece. If the troika decides to cut the taps off—and we don’t think it will—then Greece would default and exit the EZ. The Greek government aims to renegotiate the second bailout program when the troika returns to town in September. If the troika plays hardball and does not grant the Greek government any concessions, then the governing coalition would likely collapse. Also in September, the Greek parliament will have to pass a number of measures to generate €11.5 billion in savings for 2013-14. With a high degree of austerity fatigue in Greece, we can expect social unrest.

Portugal: With Portugal starting to slip on its fiscal targets, we expect Portugal to begin negotiations on a second bailout package. Currently, Portugal is meant to return to the markets in 2013 but, with bond yields well above sustainable levels, we regard this as highly unlikely.

Spain: The auditors Deloitte, KPMG, PwC and Ernst & Young are due to present their full reports on the capital needs of Spain’s financial sector in September. The findings of this report will be used to determine the exact amount the Spanish banking sector will need to borrow from the EZ’s bailout fund, the European Financial Stability Facility (EFSF).

Italy: The Italian general election campaign will begin in earnest in September. Although polls point toward a center-left-led coalition, Italian politics is at its most fluid state since the early 1990s and, with so many voters still undecided, it is impossible to call the election.

Germany: The German constitutional court is due to vote on the legality of the ESM (the successor to the EFSF) and the fiscal compact on September 12. We expect the court will deem the ESM legal but, if this does not occur, it would serve a major blow to EZ policy makers, who have committed the ESM to potentially purchasing sovereign debt in the primary markets.

France: The French government is scheduled to unveil its 2013 budget in September. Markets will be disappointed if it does not include large spending cuts, but the announcement of further austerity risks riling trade unions and stoking civil unrest.

Netherlands: A general election is scheduled for September 12. Recent opinion polls suggest the ruling right-of-center VVD will be unable to form a right-of-center majority
government. Consequently, coalition negotiations are likely to be protracted. The left-wing, euro-skeptic SP may win enough votes to be the second-biggest party. This would make it more difficult for the new Dutch coalition to secure parliamentary support for additional support measures for peripheral EZ countries.

Eurozone: There is a progress report on establishing the ECB as a single banking supervisor due out in September. Given that many details have not been hammered out yet, there is a chance that the progress made on this first step toward a banking union will disappoint.

In terms of the broader EZ developments, we expect the Greek government to collapse by the end of the year, and a Greek exit in early 2013, followed by an exit by Portugal by end-2014. Moreover, we expect Spain to receive official support from the EFSF/ESM in late 2012 after the ESM has been fully ratified (the second half of September at the earliest), while Italy will hang on longer but will eventually need support as well.

Add in that seasonally September is one of the worst months for U.S. markets and September could bring back a level of volatility that we have not seen for awhile. While I have been in the camp that just can’t comprehend how Europe holds the Euro together – the amount of money involved is truly staggering, even by U. S. debt and bailout standards, I do think German Chancellor Merkle acquiesces and gets out of the ECB’s way. In other words after a month of haggling, name calling, bluffs, and counter bluffs, the ECB turns on the printing presses before year end. Greece may or may not be invited to the party. But not sure it matters in the medium term.

I have done a 180 and think that even Greece will stay in the Euro. Consider down the road five years if Greece leaves, devalues their currency and now “competes” with the rest of Europe. Shipping costs, one of Greece’s actually industries, plummet due to the devalued Drachma, which revives the glory days of Greek shipping. Tourism is flourishing as it costs have as much to vacation in Greece as anywhere else in the Euro controlled Europe. Wouldn’t Spain, Portugal, Italy, and Ireland all be looking on and reconsider their own Euro status? Just sayin’.

Back to matters at hand. For lots of reasons, including those already mentioned, I think this rally is getting a little long in the tooth. I wouldn’t be jumping in now. Let’s get into September, see if we can find a better entry point, but be ready to invest aggressively in October.

October, November and December are traditionally strong months, especially in election years. If Draghi gets the green light to bring out the bazooka, i.e. print endless amounts of money, the big worry over the market will be lifted. Fiscal cliff will be put off, and China will be priming their pump over the winter. Forget politics, focus on the markets and we could have a strong fourth quarter, but expect things to get worse in order to make them better.

What’s Wrong, What We’re Doing About It, and When Will it All End? Part I

I’ve been suffering some serious writer’s block lately. Just can’t seem to come up with the right words to express the current condition we find our condition to be in.

Now usually in the movies, when the main character is a writer suffering from the blank page syndrome, something dramatic happens. Either he goes off to the woods to find inspiration and instead finds a gang of crazy zombies trying to break into his house and kill him. Or, typically after a bottle of bourbon, he makes a deal with the devil – inspiration for his soul. Or even worse (that is if you’re the movie watcher looking for a good action flick on a Saturday night) he finds the “love interest,” and the whole thing just turns into another weepy chick flick.

But as luck would have it, I didn’t need to recluse myself to the woods, or make a deal with the devil. Instead I had the good old European Community to snap me out of my doldrums. You see this past weekend, the G-8 world leaders met, and emerged with what had to be, one of the single most bizarre statements ever made in political/economic history. Since this incident received minimal coverage, let me set the stage and explain.

So picture the G-8 leaders (the leaders of 8 of the largest 12 world economies – they still won’t let the non-white guys in, or Russia which are basically white guys that don’t count), sitting around a table agonizing over unemployment across the EU, lack of economic growth, trillions in deficits, the Greeks are dumpster diving for food, the Spanish are turning back the clock 200 years as young men are flocking to be sheep herders – one of the few jobs available in their new “austerity” economy. Then in the midst of gloom, up pops Eddie Haskell aka French President Hollande, and he says. “Hey Beav, let’s just change our policies to “growth” and our economies will grow again!” The Beaver, played by ECB Chief Mario Drahgi, replies, “That’s a great idea Eddie, why didn’t we do that before!” Then in unison, the rest of the G-8 leaders have their V-8 moment, slap their foreheads with the palm of their hands and, in unison, exclaim, “Yes, we’ll just grow our economies!” They proudly emerge from the conference and announce to the press that they will implement a balanced approach to austerity by adding in growth measures for their economies. The world applauds, and global stock markets rally…for a day.

The immediate reaction to this “Eddie Haskell” moment, was relief. (For both of you readers that are too young to appreciate the Leave it to Beaver references, you can go to youtube.com to see what you missed). The ECB would just give growth a chance, before giving Greece, Italy, and Spain the boot. But seriously, if growth was just a matter of politicians sitting around and agreeing to implement growth strategies, what the heck have we been doing for the past decade(s)?!? You mean we needn’t go through business cycles? Booms and busts? All we have to do, to have consistent sustainable growth, is to say “Make it so”?

The reality is that growth strategy is synonymous with government spending in politician speak. The entire European Union has been implementing “growth strategies” since the formation of the EU. If deficit spending truly resulted in sustainable economic growth then Greece would have the fastest growing economy on the planet, followed by big brother and big sis, Spain and Italy. They have cumulatively spent their way into deficits that are 200% or so of their GDP, saddled their banks with bad debt, and killed off their private sectors in return for the Euro, and more cheap borrowing. You simply do not keep feeding a drunk alcohol to cure alcoholism.

The reality is, the entire G-8 has financed a global boom with massive government borrowing. The end result is that private sector growth has been stunted as capital has been siphoned off to the public sector. Now, when the accounting numbers no longer add up, debt needs to be repaid, there is just not a large and vibrant enough private sector (translation: not enough jobs and the jobs we have don’t pay enough), to generate enough tax revenue to maintain our bloated public sectors AND maintain payments on our accumulated debt. The only difference between us and Europe is that they are further down the road then we are. When the dust settles in Europe, it will be our turn. Pay attention. This is a rare opportunity to watch your future unfold before your eyes.

Why is my adrenaline flowing? Why am I worked up? Here is a quick story: A couple weekends ago I was asked to speak at a conference in Atlanta. It was hosted by one of the largest clearing firms in the US. One of the other speakers was a chief equity analyst for a very big domestic investment company that we all know and love. In addressing the European situation, he said “We see about a 5% chance that the Euro will break up”. I challenged that assessment, asking for his data that would suggest the anyone has enough money to actually get all of Europe solvent again. His reply, and I paraphrase was, “ We really don’t have any data, we just believe that a breakup of the Euro would be so catastrophic, that it just won’t happen.” Really. As he spoke visions of Wall Street bankers flashed through my head, circa 2007, and I wondered how many had said those exact same words referring to mortgages and the mortgage backed securities market?

Here is the bottom line. Risk is not about the odds of something happening. It is about the consequences if it does. The question you should be asking yourself is not whether the Euro fails or not. The question is, what happens to my investments, my retirement, my kid’s education, my sanity, if we go through another market crash as seen in 2000-2002, and 2007-2009. And if you are not willing to accept the consequences of another 50% loss or so to the equity portion of your portfolio, you need to take steps now. Either get out, lighten up on risk, or plan an exit strategy. If Greece exits, the global financial markets will be in trouble. If Europe holds it together, we will be knocking on the door of the next secular bull market – you’ll have 15 – 20 years to make some serious money. Being on the sidelines for the first 3 – 6 months or so, would really not be a big deal.

Up next: The indicators we’re watching and how we’ve prepared our portfolio’s.

MarketWatch.com article

I have a new article at MarketWatch.

The article looks at Annaly Capital Management (NLY), a common holding in our portfolios and how we manage to harvest its attractive 13%+ dividend and manage the risk.

SmartMoney article, November issue

I was interviewed for an article in this month’s issue of the Wall Street Journal’s SmartMoney Magazine. The article is titled,”The Big Delay in Your 401(k)” The article discusses how investors are discovering that their options for reacting to market swings are limited and goes on to discuss how to avoid feeling “trapped” by your 401(k) plan.

Market Outlook

A strong technical indicator looks to be approaching fast – the 200 day moving average as seen in the Chart below. From a technical perspective, in a declining market the 200 SMA is seen as the last line in the sand. The bullish view is that the market will “bounce off” and start a new rally. The bears see a cross over, or drop below the 200 SMA as the start of a major correction – defined as a 20% drop. Of course there are two ways to play it. The Bulls will recognize that there is likely to be selling if SPY crosses under the 200 SMA and will see this as a significant buying opportunity. Bears will see this as the final line of support, and if it is crossed, they will accelerate their selling. Either way, I don’t see any reason to stand in the way; this is not a time to buy as an investor. Better to sit back for a week or two and see how this unfolds.

Market Outlook

A strong technical indicator looks to be approaching fast – the 200 day moving average as seen in the chart below. From a technical perspective, in a declining market the 200 SMA is seen as the last line in the sand. The bullish view is that the market will “bounce off” and start a new rally. The bears see a cross over, or drop below the 200 SMA as the start of a major correction – defined as a 20% drop. Of course there are two ways to play it. The Bulls will recognize that there is likely to be selling if SPY crosses under the 200 SMA and will see this as a significant buying opportunity. Bears will see this as the final line of support, and if it is crossed, they will accelerate their selling. Either way, I don’t see any reason to stand in the way; this is not a time to buy as an investor. Better to sit back for a week or two and see how this unfolds.


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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