Archive for the ‘Investing’ Category

Over the weekend, I received an e-mail from a listener in Japan.  He listens to Prudent Money via the daily podcasts.  He was asking me about an investment trading strategy that he had some success using.  He asked me if it were a zero sum game if he was making money while everyone else lost. 

My answer to him was that whenever someone loses money, there is someone who makes money.  When the market was going down last year, there was someone making money.  With any investment trade, you have a winner and a loser.  You just need to have a strategy.  What most investors think of as a strategy might really end up being a disaster.  This listener has gone out and learned an investment strategy.  Buying and holding and doing nothing is a strategy.  However, it is not a good one considering this particular environment. 

When I speak of this particular environment, I am talking about the new environment which is a permanent change.  I truly believe that we will never go back to the old days (pre-2008) when it comes to investing.  If I am correct in my thinking, those who do not adapt to this new environment could be in for some real heartache.

Well, consider the environment and tell me how this enormous amount of debt is going to go away and things get back to normal.  Also consider that the Federal Government seems to be set on continuing to add to the debt on a daily basis with more and more government spending.  The following excerpt is from Michael Panzner’s blog Financial Armageddon.

Even under the best of economic circumstances, tax season is a tense time for American households. The number of hours we collectively spend working on our returns is probably a lot more than government agencies claim.

The burden in financial terms is even greater: A recent independent survey found that the average American’s total federal, state and local tax bill roughly equals his or her entire earnings from January 1 up until right before tax day.

Now imagine that tax bill doubling over time.

In recent years, the federal government has spent more money than it takes in at an increasing rate. Total federal debt almost doubled during President George W. Bush’s administration and, as much as we needed some stimulus spending to boost the economy, the nonpartisan Congressional Budget Office now estimates total debt levels could almost double again over the next eight years based on the budget recently outlined by President Obama.

Regardless of what politicians tell you, any additional accumulations of debt are, absent dramatic reductions in the size and role of government, basically deferred tax increases. Remember the old saw? “You can pay me now or you can pay me later, with interest.”

To help put things in perspective, the Peterson Foundation calculated the federal government accumulated $56.4 trillion in total liabilities and unfunded promises for Medicare and Social Security as of September 30, 2008. The numbers used to calculate this figure come directly from the audited financial statements of the U.S. government.

If $56.4 trillion in financial commitments is too big a number to digest, think of it as $483,000 per American household, or $184,000 for every man, woman and child in the country.

So, this is the environment that we are dealt and it is full of risk.  Investors need to learn a strategy or have someone manage money that understands the concept of strategy and investing versus buying and holding.

Market Update

As I wrote last week, my indicators are sending a warning sign right now.  The markets are having a very tough time this morning (at the time of writing).  This is the worst morning opening that we have encountered in a while.  It is important to look for a change of character in the market.  This is pre-mature and purely on gut feeling.  I think that we are seeing a change of character right now. The bear might be back.  


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Part 1 of a series on how to use this daily stock market outlook

I won’t deny it, last week was a big week for the bulls.  Last week finished the best 4 week rally in the stock market since 1933.  Typically when markets go through these big rallies, the stock market will go through a period of selling.  The key is whether the rally will resume after investors take a break for a while.  At least in the short-term, this is the last chance for the bears to take back control of the stock market.  If the bears cannot send this market back into a decline, this market rally might be with us for a while.  The golden opportunity for the bears is earnings season.  Earnings season kicks off tomorrow morning. This is the time of the year where companies give the good and the bad news. It has been a rough time for the stock market lately.  If the bulls can get through this period, that would be a positive sign for the stock market.

This morning the market is declining after a big 4 weeks.  Nothing has changed in my overall assessment of the stock market.  I still think that we are in a long-term bear market and experiencing what is referred to as a bear market rally. 

The big question is how long will this rally last and how big will it be?  I could also be very wrong and the worst could be behind us, signaling the start of the next great bull market.  The answer to these questions is key, no matter what type of investor you are today.  Whether you are a 401(k) plan investor, have accounts with a financial advisor, or invest your own money, this is a key question.

Over the next few days I will be introducing a new way to use this daily market outlook.  Yes, it will be written in such a way that even the most novice investor can understand it.   The key is – You need to know when to increase or decrease risk in your investment.  You increase or decrease risk by increasing or decreasing the percentage of money that you have invested in stocks, stock based mutual funds, or investment accounts. 

Yes, stock market investing gets more complicated than just looking at risk as the percentage invested in stocks or stock funds.  However, just understanding some key strategies can make a HUGE difference in your success as an investor.  So, before tomorrow, determine which category describes you at the moment:

1)  Want to reduce or increase risk

2)  Want to invest new money

3)  Want to trade and time your investing



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“New Signs Emerge That the Worst is Over”

“Investors hope that the worst is behind us”

Give one good bear market rally and all of the problems in the world are fixed.  This morning highlights the risk that plagues this economy and the stock market.   Hope is what you have when you pull the handle on the slot machine.  You hope to hit the jackpot.  Investing in hope is dangerous.  Going with the opinions of Wall Street and politicians are even dangerous. 

The headlines are there to lead people to believe that the risk is gone and now you don’t have to think about it.  This morning’s unemployment numbers put an explanation point behind the problem in America.

Even most analysts believe that we are looking at these horrible numbers for the entire year.  We are losing in excess of 600,000 jobs a month right now.  This morning it was announced that we lost 663,000 jobs this past month.  There are an estimated 13.2 million people out of work (at least that the Government will acknowledge). The unemployment is sitting at 8.5%.  The real unemployment is around 15% when you add everybody in that is not being counted.

One service that tracks these economic numbers attempts to get the real number.  The last estimate I saw was an unemployment rate close to 19%.

The following is an excerpt from a letter I wrote to my clients yesterday:

I think that we will all agree that unemployment is the biggest problem that faces the economy.  In normal times, an employment rate that rises to 7 or 8% creates a recession.  Today the employment rate could go north of 10% (using the Government’s inaccurate data). 


So when unemployment starts to improve and the rate drops all the way down to 7 or 8%, does the economy really get any better? 


If the plan to fix the unemployment problem consists, for the most part, of a bunch of construction jobs, where the bulk of which don’t start until next year, what is going to fix the unemployment problem? Further, of those construction jobs that have to be filled, how many will really go to Americans when there are countless numbers of  illegal aliens ready to take them?  Remember, they are not checking government ID’s on these jobs.

This is the problem that is not being addressed.  I suggest it is the problem that will further plague this market and economy. 

The unemployment numbers were worse than the headline would suggest.  January’s unemployment was revised, adding another 100,000 plus people to the unemployment ranks.  Then you have the Government’s “estimated” job growth. This is my favorite.  Each month they apply a ratio called the birth/death ratio to the unemployment numbers. 

This number “estimates” the number of jobs created that the Department of Labor can’t get data for.  They are assuming these are created by small businesses.  This month they added 141,000 jobs to the total number.  So before that “estimated” number was added, the actual job loss was close to 800,000 jobs. You add in the downward revisions for January and you are getting close to 1,000,000 jobs. 

The Government “estimated” that 41,000 jobs were added in the Leisure sector.  Yes, that is realistic since so many people have a lot of money to spend on leisure activities. I can see where that sector would be booming.

There is no doubt about it.  Risk is still real in this economy and market.  Approach your investments cautiously.



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News that came out over the weekend underscores why you cannot trust anything that comes from companies or the Government.  Wasn’t it just a few weeks ago that everyone was getting giddy over GM’s then-CEO Rick Wagoner’s comments about not needing any money from the Government and that everything is going just fine? 

In a recent client newsletter, I wrote the following:

Then GM made a bold announcement that they didn’t need any taxpayer money.  The market loved that news.  I think that they should have added one little tagline to that statement…”at least not this week.” 

Can you imagine the conversation between Tim Geithner and GM’s CEO Rick Wagner?  Hey Rick, how are you doing on funds this week?  Tim, we are looking good.  Taxpayer money is holding up.  Check back with me next week.  After all, we have some big corporate events and parties that need funding.

The audacity of a CEO making a statement like that when there is no way that everything was OK.  Well, big brother has spoken.

Then there is this string of “encouraging” economic news over the past few weeks. Economic numbers have surprisingly come out better than expected.  How could that be when Rome appears to be burning?  Well, thanks to the economic funny number crunching group, good economic numbers can be manufactured at the drop of a hat.  Barron’s Alan Abelson wrote this over the weekend:

The misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment — you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment. As it turns out, the seasons don’t need adjustment as much as the adjustors need seasoning.

As Merrill Lynch’s David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada’s gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February’s economic data.

To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record. He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February “all of a sudden becomes a headline-adjusted annual rate figure of 583,000.”

Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.”

This is why Wall Street has been bullish in recent weeks.  I think that this underscores that this bear market is far from over and Wall Street/Government (the irony is that they might be one in the same before it is all over with) want you to think everything is just OK.

So, how long will this stock market rally last?

I have been getting questions about this recent bear market rally and how long I think that it will last.  Let’s take a look at what happened in 2000.  The best bear market rally was 21%.  There was another that was 18%.  Basically, those were the two biggest bear market rallies from the bear market.  It is way too tough to speculate number of days.  This bear market is much different and more like the 1929 bear market.  I would rather focus on total gain of the bear market rally rather than how long it has lasted.  The reality is that this bear market rally could already be over. 

Thus far, we had a 24% bear market rally that lasted from November 20, 2008 to January 6, 2009.  The current bear market rally has gone up as much as 23% before last Friday. This GM news is very significant.  There had to come a time where the Government allowed for nature to take its course. Unfortunately, they have waited too long to allow the process to occur.

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This is not to be taken as advice.  This is a discussion on price levels and for educational purposes only.  There is no sure fire way to manage risk.  It is a process.

You’ve given us 3 price levels to watch. What should an investor’s reaction be with their portfolios given this information? Perhaps you can give a few examples?

This is a great question. I appreciate all of the questions that I have received both through e-mail and on the blog.  This is how we can learn this information together as a community. 

I want to add another layer to the discussion of price levels.  Let’s think short-term, medium-term, and long-term.  In other words, what direction is the market going in these three time periods?  Is it going up, down, or is it just moving sideways? 

Always think of the direction of the market as the direction of the value of your account. For the past 17 months, most investors’ accounts have been moving down with the long-term direction of the market.

I am only going to answer this from the standpoint of when you increase stock exposure through a stock index fund or ETF and when you decrease it.   If you are fully invested in the stock market and the stock market continues to stay above the 800 to 825 price levels, then you watch carefully.  Remember, we are looking for the market to go above 825 for things to start looking positive in the short-term. 

If the stock market were to get above the price level of 825 and stay there, then you might start to either increase your exposure (gradually) to the stock market or simply maintain what you have already invested.  As we see this morning, the stock market is already back below the 825 price level on the S&P 500.  Thus, yesterday’s close at the end of the day above 825 was not yet the positive sign that we are looking for.  

If the stock market falls below the price level of 800, that is a warning and, given the nature of the environment, might be a signal to you that it makes sense to reduce the exposure (sell) to your stock investment.  If the stock market continues to fall and goes down to 741 and closes below that level, you are taking extreme risk.  Remember the next price level down is between 575 and 600. 

It is in the short-term that investing is the trickiest.  If the market is really going to go up in value over maybe the next few months, you would want to participate and stay invested.   However, we are still in a dangerous environment, making the risk level even greater.  It truly is high risk for high reward. 

Now, for most investors, you want to look at the medium-term time period.  When the market starts to look positive in the medium-term, the risk level for investing in stocks starts to really diminish.  What would I call the medium-term?  In my opinion, the S&P 500 would have to get all the way back up to between 1200 and 1300 for the medium-term period to look good. 

The ideal time to be fully invested in stocks is when the short-term, medium-term, and the long-term are all positive.  Right now, the short-term is slightly positive, and the medium-term and long-term are both negative.

I know that this gets confusing.  However, you have to remember the objective right now.  As an investor, you always want to know what the risk and reward looks like for stocks.  The overriding principle is that you don’t want to be taking a ton of risk if there is a big possibility of you losing a lot of money.


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The objective of this daily stock market outlook is to help educated you on how risk and stocks work.  Although it is not always easy to take something like investing and make it understandable, this is my objective.  So, please work with me to learn this information.  If you have not done so, please read this post about price levels and trends.  It will be helpful for you as you start to learn this information.  I always welcome any feedback. 

With yet another price decline today, it leaves you contemplating one question.  At what price level will the S&P 500 stop losing value?  Today, the S&P 500 lost another 1% finishing at a price level of 676.  We are 56.8% below the all time high of the S&P 500 set in October 2007.  That does seem like an eternity ago.

In looking at all of the analysis, I have come to the following conclusion.  The good news is that I do feel we are close to that bear market rally.  The bad news is that we might have to decline another -18% before we get there.  If you are a trader, that might be an excellent point to invest money for a 30% plus gain.  I do feel that this bear market rally that we are certainly due will be a scorcher. 

If you are wanting to reduce risk in your portfolio (reduce the amount of money invested in stocks), then this should provide an excellent opportunity to get back some of the loss and start selling stocks.  No, I don’t think that will be the bottom. This is why I still think that it will be important to reduce your risk down to a level that you are comfortable.  Remember, you can accomplish that by reducing the amount of money that you have exposed to stocks and stock-based funds.

This continues to be a very dangerous stock market like none we have seen since the 1929 to 1932 bear market.  Invest very carefully.

Update Tuesday Morning 3/10/09

Markets look good right out of the gate this morning with the S&P 500 on its way to test the price level of 700.  If the market can close above that price level (700), that would be a real positive.  Then we would want to see some more of the same over the next few days.

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